LEBANON Time for an ECONOMIC Equitable MONITOR Banking Resolution Fall 2022 Lebanon Economic Monitor Time for An Equitable Banking Resolution ‫حان الوقت إلعادة هيكلة‬ ‫القطاع المصرفي على نحو منصف‬ L’urgence d’une résolution bancaire équitable Fall 2022 Global Practice for Macroeconomics, Trade & Investment Middle East and North Africa Region LEBANON ECONOMIC MONITOR Document of the World Bank The Delibera Depressi TABLE OF CONTENTS Acronyms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . v Preface . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . vii Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ix ‫الموجز التنفيذي‬ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xiii Résumé analytique . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xv 1.  The Policy Context . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2.  Recent Macro-Financial Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 A.  Output and Demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5 B.  Fiscal Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 C.  The External Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 D.  Money and Banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10 3.  Outlook and Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17 Special Focus I: Global Comparators: The Hole is Greater Than the Sum of its Parts . . . . . . . . . . . 21 A.  Fundamentals of Fragility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21 B.  The Macroeconomics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22 Special Focus II: Dollarization in Lebanon . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 I.  Accounting for Dollarization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 II.  Determinants of Dollarization in Lebanon . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 a.  Exchange rate and macroeconomic policies and environment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 b.  Macro and micro-prudential policies and environment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 c.  Depth of financial and capital markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 iii List of Figures Figure 1 Lebanon’s Economy Contracted for a Fourth Consecutive Year in 2021 . . . . . . . . . . . . . . . . . . . . . 6 Figure 2 Net Exports Have Been the Sole Positive Contributor to Real GDP since 2019 . . . . . . . . . . . . . . . .6 Figure 3 Spending Collapsing Faster than Revenue Generation Inducing Positive Fiscal Balance in 2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8 Figure 4 Revenues Falling at a Slower Pace than Expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Figure 5 Revenue Components Falling Across the Board Causes a Decrease in Total Revenues (as a % of GDP) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8 Figure 6 Valuation Effects from Exchange Rate Depreciations Will Pressure the Debt-to-GDP Ratio . . . . . .8 Figure 7 A Steady Depletion in the Gross Foreign Exchange Position at BdL . . . . . . . . . . . . . . . . . . . . . . . . 10 Figure 8 A Sharp Depreciation in the Exchange Rate along with Surging Inflation and Narrow Money 11 Figure 9 Inflation in Basic Items Is a Key Driver of Overall Inflation, Hurting the Poor and the Middle Class . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Figure 10 Short-Lived Appreciation in the US$ Banknote Rate Following BdL’s Active Interventions in the FX Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Figure 11 A Steady and Sharp Deterioration in Credit Performance as Measured by NPL Ratio for Banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Figure 12 Lebanon Sees the 2nd Sharpest Contraction in Real GDP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Figure 13 Sustained Real GDP Contraction Is Expected to Erase 15 Years of Progress by End-2022 . . . . 23 Figure 14 Real GDP Per Capita Contracting since 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Figure 15 Only Venezuela’s Monumental Inflation Beats that in Lebanon . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23 Figure 16 Lebanon Maintains the Worst CA Deficit Throughout . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .24 Figure 17 While Its Fiscal Deficit Narrows Only after the Crisis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .24 Figure 18 Lebanon’s Public Debt Is the Worst among Comparators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .24 Figure 19 Lebanon Suffered from Consistently Sizable External Deficits since the End of the Civil War 26 Figure 20 High Rates of Financial Dollarization Were a Fundamental Feature Post-Civil War Lebanon . . . . 27 Figure 21 FX-Denominated Checks Consistently Out-Valued LBP-Denominated Checks over the 1991–2019 Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Figure 22 The Lira Suffered Multiple Crises before the Peg Was Introduced . . . . . . . . . . . . . . . . . . . . . . . . . .29 Figure 23 Dollarization Rates on Deposits and Lending Interacted in Distinct Ways Over Three Main Periods. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 List of Tables Table 1 Fiscal Balance (2020–2022) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7 Table 2 Bailout Costs in Ireland and Iceland . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Table 3 Selected Macroeconomic Indicators for Lebanon; 2013–2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 List of Boxes Box 1 Government Budget 2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Box 2 Too Big to Bail . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Box 3 Estimating the Import Share of the Consumption Basket . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .28 iv LEBANON ECONOMIC MONITOR: TIME FOR AN EQUITABLE BANKING RESOLUTION ACRONYMS ABL Association of Banks in Lebanon GoL Government of Lebanon AER Average Exchange Rate IMF International Monetary Fund AML Anti-Money Laundering LBP Lebanese Pound ATM Automated Teller Machine LEM Lebanon Economic Monitor AUB American University of Beirut LMIC Lower Middle-Income Country BCC Banking Control Commission LNG Liquid Natural Gas BdL Banque du Liban LBP Lebanese Pound BNR Banknote Rate MoF Ministry of Finance BTA Beirut Traders Association NPL(s) Non-performing Loan(s) CA Current Account PA Prior Action CAS Central Administration of Statistics pmi Purchasing Manager’s Index CEDRE Conférence Economique pour le pM Prime Minister Développement, par les Réformes et pp Percentage Points avec les Entreprises SLA Staff-Level Agreement CFT Combating the Financing of Terrorism soe State-Owned Enterprise CPI Consumer Price Index tb(s) Treasury Bond(s) DRF Deposit Recovery Fund TBTF Too-Big-To-Fail EdL Electricité du Liban TMTF Too-Many-To-Fail EFF Extended Fund Facility ToR Terms of References FCS Fragile and Conflict States UMIC Upper Middle-Income Country FI(s) Financial Institution(s) US$ United States Dollar fx Foreign Exchange VAT Value Added Tax gdp Gross Domestic Product WEO World Economic Outlook GNI Gross National Income (per capita) yoy Year over Year v PREFACE T he Lebanon Economic Monitor provides from Naji Abou Hamde (Economic Analyst) and an update on key economic developments Ibrahim Jamali (Consultant). The Lebanon Economic and policies over the past six months. It also Monitor has been completed under the guidance of presents findings from recent World Bank work on Eric Le Borgne (Practice Manager), Norbert Fiess Lebanon. The Monitor places these developments, (Lead Economist), and Jean-Christophe Carret policies, and findings in a longer-term and global (Country Director). Zeina Khalil (Communications context and assesses their implications on the outlook Officer) is the lead on communications, outreach, and for Lebanon. Its coverage ranges from the macro- publishing. economy to financial markets to indicators of human The findings, interpretations, and conclusions welfare and development. It is intended for a wide expressed in this Monitor are those of World Bank audience, including policy makers, business leaders, staff and do not necessarily reflect the views of the financial market participants, and the community of Executive Board of The World Bank or the govern- analysts and professionals engaged in Lebanon. ments they represent. The Lebanon Economic Monitor is a product For information about the World Bank and its of the World Bank’s Lebanon Macroeconomics, activities in Lebanon, including e-copies of this publi- Trade and Investment (MTI) team. It was written by cation, please visit www.worldbank.org/lb. Dima Krayem (Senior Economist), Naji Abou Hamde To be included on an email distribution list (Economic Analyst) and Ibrahim Jamali (Consultant), for this Lebanon Economic Monitor series and with contributions from Lars Jessen (Lead Debt related publications, please contact Alain Barakat Specialist), and Ulle Lohmus (Senior Financial (abarakat@worldbank.org). For questions and com- Sector Economist). The Special Foci entitled Global ments on the content of this publication, please Comparators: The Hole is Greater Than the Sum of its contact Dima Krayem (dkrayem@worldbank.org). Parts and Dollarization in Lebanon have been led by Questions from the media can be addressed to Zeina Wissam Harake (Senior Economist), with contributions Khalil (zelkhalil@worldbank.org). vii EXECUTIVE SUMMARY Recent Economic Developments to depreciate sharply. The Lebanese Pound (LBP) depreciated 137 percent in 2020, by 219 percent in The economy continues to contract, albeit at 2021, and in the first 10 months of 2022 is already a somewhat slower pace. Owing to better-than- down an additional 145 percent (Average Effective expected data, we are revising (upward) our estimated Exchange Rate as estimated by the World Bank).1 The contraction in real GDP for 2021 to a nonetheless steady depreciation is despite BdL’s FX interventions significant 7 percent (from 10.4 percent in the last to attempt to stabilize the banknote rate (BNR)/parallel LEM). Our 21.4 percent estimated contraction in market exchange rate at the expense of dwindling real GDP in 2020 remains unchanged. While tourist reserves. arrivals have risen by 132 percent (yoy) in 12M-2021, The sharp deterioration in the currency up from a Covid-induced low base, the recovery has continues to drive surging inflation, in triple digits not been sufficient to compensate for the persistent since July 2020, impacting the poor and vulner- increase in the current account deficit and the able the most. Inflation averaged 150 percent in substantive drop in private consumption. 2021 and 218 percent (yoy) in the first half of 2022 Public finances improved in 2021, but (reaching a peak of 240 percent (yoy) in January only because spending collapsed faster than 2022). Inflationary pressure was exacerbated by revenue generation. Revenues are estimated to the rise in global food prices since the onset of have declined from an already low 13.1 percent of the Ukraine war. Globally, Lebanon is one of the GDP in 2020 to 6.6 percent of GDP in 2021, among countries most affected by food price inflation owing the lowest rates globally. As the decline in revenue to the destruction of its strategic wheat reserves in was, however, outpaced by an even larger decrease the Beirut port explosion, heavy dependance on in total expenditures (10.5 percentage points (yoy) to Ukrainian and Russian wheat imports and the depre- 5.9 percent of GDP), the 2021 overall fiscal balance ciation of the LBP; food inflation stood at 332 percent is estimated to have reached a surplus (of 0.7 percent of GDP). 1 The Bank-calculated Average Exchange Rate (AER) Testament to the continued atrophy of Leb- methodology is detailed in the Lebanon Economic anon’s economy, the Lebanese Pound continues Monitor, Fall 2020: The Deliberate Depression. ix (yoy) in June 2022. Inflation is a highly regressive tax, depreciation. The increase in the pass-through is also disproportionally affecting the poor and vulnerable, linked to higher levels of dollarization in the economy- especially since basic goods including food items are notably for services that had been previously priced in the primary drivers of overall inflation. LBP at lower than market value exchange rates and Surprisingly, for a country in a pro- have now been dollarized. tracted and deep depression, and in sovereign An unprecedented institutional vacuum default, Lebanon continues to run a sizable cur- will likely further delay any agreement on crisis rent account deficit. The current account deficit resolution and much needed reforms; this includes increased from 2020 to 2021 (from 9.3 to 12.5 per- prior actions as part of the April 2022 IMF staff-level cent of GDP, respectively), and is expected to broaden agreement (SLA). While Lebanon is no stranger to further in 2022. Customs data point to: (i) a higher political paralysis, the price of an institutional vacuum energy import bill (in US$) as lower volumes are offset is at an all-time high, as it impedes decision-making by surging global energy prices, and (ii) a significant and reform ratification, deepening Lebanon’s long- nominal increase in non-energy imports (by 21.1 per- term economic woes and the plight of the Lebanese cent in 2021). The current account deficit continues people. An IMF program remains elusive as the to be financed from the remaining usable gross for- authorities have yet to complete ten reforms up front. eign reserves at the central bank and a pervasive cash A fragmented parliament, coupled with governmental economy, in which importers have also relied on cash and presidential vacuum casts further doubt on the to access credit lines for imports that now require ability to complete prior actions and secure a final 100 percent cash collateral. agreement in the next few months. Outlook and Risks Time for An Equitable Banking Resolution Real GDP is projected to contract by a further 5.4 percent in 2022 assuming continued political Divergent views among key stakeholders on how paralysis and no implementation of a recovery to distribute the financial losses remains the strategy. The BLOM-PMI index has inched up to main bottleneck for reaching an agreement on 48.5 in the first nine months of 2022 and tourist a comprehensive reform agenda. Such discord arrivals have increased by 51.2 percent (yoy) until prevents banking sector resolution which is critical August. However, net exports remained negative, for restoring financial sector stability and economic as imports increased faster (40.7 percent (yoy) in recovery. Global best-practice principles endorse a 7M-2022) than exports (12.7 percent). Part of the financial sector rehabilitation strategy that recognizes increase in imports was driven by industrial goods and addresses the large losses in the sector upfront, imports (42.7 percent).2 Anticipated increases in respects the hierarchy of claims, protects small custom duties and the customs duties exchange rate depositors, and refrains from recourse to public have likely contributed to the substantive increase in resources. Key stakeholders in Lebanon, however, industrial goods imports and have driven the hoarding strongly oppose such a resolution, calling on the of those goods in anticipation of the price adjustment. State to bear responsibility for the ongoing crisis Inflation is expected to average 186 per- and to privatize public assets and/or draw on future cent in 2022, amongst the highest globally, partly government revenues to bail-out the financial sector. due to the shrinking share of imports based on BdL subsidized rates. This surge in the inflation 2 This includes imports of the following categories: Wood, rate arises despite a relative decrease in narrow Rubber and Chemical Products; Non-Metallic Products; money supply growth in 8M-2022, owing to a change Textiles; Capital Goods; and Equipment Other than in the dynamic relationship between inflation and Capital Goods. x LEBANON ECONOMIC MONITOR: TIME FOR AN EQUITABLE BANKING RESOLUTION The size of the balance sheet and associ- one overly dependent on the other, and in the end ated losses make Lebanon’s financial sector, too leading to systemic failure. With the sovereign default big to bail. Financial losses exceed US$72 billion, of March 2020, the erstwhile equilibrium has collapsed. equivalent to more than three times of GDP in 2021. Lebanon must now move to a new sustainable develop- Combined losses stem from a public sector in default, ment model. Delays in the day of reckoning with the a central bank holding the largest negative reserves magnitude and viable distribution of financial losses position in the world, and an oversized and insolvent will only compound human and social capital losses. banking system. Therefore, the magnitude of the As repeatedly called for, Lebanon needs to urgently holes in the intertwined balances sheets of the Central adopt a domestic, equitable, and comprehensive solu- Bank, the banking sector and the Sovereign, dwarfs tion that is predicated on: (i) addressing upfront the the current and future assets that the sovereign could balance sheet impairments, (ii) restoring liquidity, and realistically mobilize for a bailout. State-owned assets (iii) adhering to sound global practices of bail-in solu- and public real estate are worth only a fraction of the tions based on a hierarchy of creditors (starting with estimated financial losses, as are any potential rev- banks’ shareholders) that protects small depositors. enues from oil and gas, which are still indeterminate and in any case years away. Given the uncertain valuation of both assets, any crisis resolution plan that Special Foci relies on these would lack credibility and fail. A bailout of the financial sector by tax- Lebanon’s four-year contraction in real GDP payers would redistribute wealth from poorer to has already wiped out 15 years of economic richer households, as the public would be asked growth and is scarring the country’s potential to compensate bank equity holders and wealthy for recovery. The depth of the cumulative economic depositors. Pre-crisis, 50 percent of deposits in contraction ranks Lebanon’s ongoing crisis among the Lebanon’s banking system were owned by 1 percent worst ever since the 1850s.3 In Special Focus I, we of depositors; with 20 percent of deposits held among assess the severity of Lebanon’s crisis by comparing 0.01 percent of depositors. The heavy concentration it to a select group of Fragile and Conflict States of deposits amongst a few high-net-worth individuals, (FCS). We conclude that Lebanon’s macroeconomic marking one of the most unequal distribution of performance is worse—or—at best—on par, with deposits in history, must serve as a basis for equity those of this specific FCS group (Zimbabwe, Yemen, and fairness considerations. As argued in our Spring Venezuela and Somalia). Strikingly, the contraction to 2021 Lebanon Economic Monitor issue Lebanon date is comparable to that Yemen during the first four Sinking (to the Top 3), not only is a bailout of the years of war. The depth and duration of the Deliberate financial sector unviable, but it is also inconsistent with Depression4 is reducing Lebanon’s potential for the restructuring principles that protect taxpayers and growth as its physical, human, social, institutional, small depositors and foster equitable burden sharing. and environmental capital are rapidly and potentially A bail-in solution, based on a creditors’ irreparably being depleted. hierarchy, along with comprehensive reforms is the In Special Focus II, we analyze dollarization only realistic option for Lebanon to turn the page in Lebanon, and conclude that the current crisis on its flawed development model. A bail-in, makes will likely reinforce high levels of dollarization, large creditors and shareholders bear the main cost even upon recovery. Historically, multiple currency of bank restructuring, by writing down, canceling and/ crises led to hysteresis in dollarization in the country, or converting liabilities into equity; this allows viable banks to regain solvency and ensures the protection of 3 See Lebanon Economic Monitor, Spring 2021: Lebanon small depositors. Lebanon’s post-civil war development Sinking (to the Top 3). model has been characterized by strong interlinkages 4 See Lebanon Economic Monitor, Fall 2020: The between the fiscal-monetary-financial sectors, rendering Deliberate Depression. Executive Summary xi with the extent of dollarization widening over time to reduce or reverse dollarization. Going forward, the for deposits, lending, and public debt. We find that current crisis will further reinforce the hysteresis driver Lebanon’s financial system was not developed of dollarization. The development of capital markets beyond the banking sector, and the lack of a capital remains unattainable under current conditions and market has prevented the development of diversifica- will require macroeconomic stability in the short term tion and hedging instruments that could have helped and new growth model in the long term. xii LEBANON ECONOMIC MONITOR: TIME FOR AN EQUITABLE BANKING RESOLUTION ‫الموجز التنفيذي‬ ‫يستمر التدهور الحاد يف قيمة العملة يف دفع التضخم املتزايد‪،‬‬ ‫أحدث املستجدات االقتصادية‬ ‫الذي سجل أرقاماً ثالثية منذ يوليو‪/‬متوز ‪ ،2020‬مام كان له أشد األثر عىل‬ ‫الفئات الفقرية واألكرث احتياجاً‪ .‬وقد بلغ متوسط التضخم ‪ 150%‬يف عام‬ ‫يواصل االقتصاد اللبناين االنكامش‪ ،‬وإن كان بوترية أبطأ إىل حد ما‪ .‬ونظرا ً‬ ‫‪ 2021‬و ‪( 218%‬عىل أساس سنوي) يف النصف األول من عام ‪( 2022‬إذ‬ ‫لتوافر بيانات أفضل من املتوقعة سابقاً‪ ،‬فإننا نراجع تقديراتنا لنسبة‬ ‫بلغ ذروته بنسبة ‪ ،240%‬عىل أساس سنوي‪ ،‬يف يناير‪/‬كانون الثاين ‪.)2022‬‬ ‫االنكامش يف إجاميل الناتج املحيل الحقيقي لعام ‪ 2021‬لتصبح ‪ ،7%‬وهي‬ ‫وتفاقمت الضغوط التضخمية بسبب ارتفاع األسعار العاملية للمواد الغذائية‬ ‫تُعد أيضً ا نسبة مرتفعة‪ ،‬من نسبة ‪ 10.4%‬املقدرة يف آخر تقرير ملرصد‬ ‫منذ اندالع الحرب يف أوكرانيا‪ .‬عىل الصعيد العاملي‪ ،‬يُعد لبنان من أكرث‬ ‫االقتصاد اللبناين‪ .‬وال يطرأ أي تغيري عىل تقديرنا لالنكامش يف إجاميل الناتج‬ ‫البلدان ترضرا ً من تضخم أسعار املواد الغذائية بسبب تدمري احتياطياته‬ ‫املحيل الحقيقي يف عام ‪ 2020‬بنسبة ‪ .21.4%‬عىل الرغم من ارتفاع عدد‬ ‫اإلسرتاتيجية من القمح جراء انفجار مرفأ بريوت‪ ،‬واالعتامد الشديد عىل‬ ‫السائحني الوافدين خالل عام ‪ 2021‬بنسبة ‪( 132%‬عىل أساس سنوي)‪،‬‬ ‫واردات القمح األوكراين والرويس‪ ،‬وانخفاض قيمة اللرية اللبنانية‪ .‬وقد بلغت‬ ‫من مستواه الذي كان منخفضاً بسبب جائحة فريوس كورونا‪ ،‬مل يكن‬ ‫نسبة تضخم أسعار املواد الغذائية ‪( 332%‬عىل أساس سنوي) يف يونيو‪/‬‬ ‫هذا التعايف كافياً لتعويض الزيادة املستمرة يف عجز الحساب الجاري‬ ‫حزيران ‪ .2022‬والتضخم ما هو إال رضيبة تنازلية‪ ،‬تؤثر بشكل غري عادل‬ ‫واالنخفاض الكبري يف حجم االستهالك الخاص‪.‬‬ ‫عىل الفئات الفقرية واألكرث احتياجاً‪ ،‬ال سيام وأن السلع األساسية‪ ،‬مبا فيها‬ ‫تحسنت أوضاع املالية العامة يف عام ‪ ،2021‬وهو ما يُعزى إىل‬ ‫املواد الغذائية‪ ،‬هي العنارص الرئيسية التي تدفع معدل التضخم الكيل‪.‬‬ ‫الرتاجع الكبري يف اإلنفاق عىل نحو أرسع من اإليرادات‪ .‬وتشري التقديرات‬ ‫من املثري للدهشة أن بلداً مثل لبنان الذي يعيش حالة كساد‬ ‫إىل أن اإليرادات تراجعت من مستوى منخفض بالفعل بلغ ‪13.1%‬‬ ‫طويلة وعميقة وقد توقف أيضاً عن سداد ديونه السيادية‪ ،‬يستمر يف‬ ‫من إجاميل الناتج املحيل يف عام ‪ ،2020‬إىل ‪ 6.6%‬يف عام ‪ ،2021‬وهذه‬ ‫تسجيل عجز كبري يف الحساب الجاري‪ .‬فقد زاد هذا العجز من ‪ 9.3%‬من‬ ‫النسبة من بني أدىن املعدالت عاملياً‪ .‬مع ذلك‪ ،‬فإنه نظرا ً ألن االنخفاض‬ ‫إجاميل الناتج املحيل يف عام ‪ 2020‬إىل ‪ 12.5%‬يف عام ‪ ،2021‬ومن املتوقع‬ ‫يف اإليرادات قد تجاوزه بالفعل انخفاض أكرب يف إجاميل النفقات (‪10.5‬‬ ‫أن يزداد أكرث يف عام ‪ .2022‬وتشري البيانات الجمركية إىل ما ييل‪ )1( :‬ارتفاع‬ ‫نقطة مئوية‪ ،‬عىل أساس سنوي‪ ،‬إىل ‪ 5.9%‬من إجاميل الناتج املحيل)‪ ،‬تشري‬ ‫فاتورة استرياد الطاقة (بالدوالر) ألن انخفاض حجم االستهالك يقابله ارتفاع‬ ‫التقديرات إىل أن رصيد املالية العامة الكيل لعام ‪ 2021‬قد حقق فائضاً‬ ‫أسعار الطاقة عاملياً‪ ،‬و(‪ )2‬زيادة كبرية يف القيمة االسمية للواردات خالف‬ ‫(بلغ ‪ 0.7%‬من إجاميل الناتج املحيل)‪.‬‬ ‫ول‬‫الطاقة (بنسبة ‪ 21.1%‬يف عام ‪ .)2021‬وال يزال عجز الحساب الجاري مي َّ‬ ‫يف دليل عىل استمرار االنكامش الشديد يف االقتصاد اللبناين‪،‬‬ ‫مام تبقى من إجاميل االحتياطيات األجنبية القابلة لالستخدام لدى البنك‬ ‫تواصل قيمة اللرية اللبنانية االنخفاض بشكل حاد‪ .‬انخفضت قيمة اللرية‬ ‫املركزي ومن اقتصاد نقدي منترش‪ ،‬يعتمد فيه املستوردون أيضاً عىل التمويل‬ ‫اللبنانية بنسبة ‪ 137%‬يف عام ‪ ،2020‬وبنسبة ‪ 219%‬يف عام ‪ .2021‬ثم‬ ‫الذايت (النقدي) ليتمكنوا من إجراء تحويالت مبارشة لتمويل الواردات‪.‬‬ ‫شهدت يف األشهر العرشة األوىل من عام ‪ 2022‬مزيدا ً من االنخفاض بنسبة‬ ‫‪( 145%‬متوسط سعر الرصف الفعيل وفقاً لتقدير البنك الدويل)‪ 5.‬ويأيت‬ ‫‪ 5‬يتضمن عدد الخريف لعام ‪ 2020‬من تقرير مرصد االقتصاد اللبناين‬ ‫االنخفاض املستمر يف قيمة العملة عىل الرغم من تدخالت مرصف لبنان يف‬ ‫توضيحاً مفصالً ملنهجية احتساب متوسط سعر الرصف لدى البنك الدويل‪:‬‬ ‫سوق الرصف األجنبي ملحاولة تثبيت سعر الرصف للسحب النقدي ‪ /‬سعر‬ ‫مد (الرابط)‬ ‫الكساد املتع َّ‬ ‫الرصف يف السوق املوازية عىل حساب االحتياطيات اآلخذة يف التناقص‪.‬‬ ‫‪xiii‬‬ ‫مني بها هذا القطاع وتعالجها عىل الفور‪ ،‬وتحرتم‬ ‫بالخسائر الكبرية التي ُ‬ ‫اآلفاق املستقبلية واملخاطر املحيطة بها‬ ‫ترتيب املطالبات‪ ،‬وتحمي صغار املودعني‪ ،‬ومتتنع عن اللجوء إىل املوارد‬ ‫العامة‪ .‬ومع ذلك‪ ،‬تعارض األطراف املعنية الرئيسية يف لبنان هذا الحل‬ ‫من املتوقع أن ينكمش إجاميل الناتج املحيل الحقيقي بنسبة‬ ‫بشدة‪ ،‬وتطالب الدولة بتحمل املسؤولية عن األزمة املستمرة وبخصخصة‬ ‫‪ 5.4%‬إضافية يف عام ‪ ،2022‬بافرتاض استمرار حالة الجمود السيايس وعدم‬ ‫األصول العامة‪ ،‬أو االستفادة من اإليرادات الحكومية يف املستقبل إلنقاذ‬ ‫تنفيذ إسرتاتيجية شاملة للتعايف‪ .‬وقد ارتفع مؤرش مديري املشرتيات لبنك‬ ‫القطاع املايل‪ ،‬أو كليهام‪.‬‬ ‫بلوم إىل ‪ 48.5‬يف األشهر التسعة األوىل من عام ‪ ،2022‬وزاد عدد السائحني‬ ‫إن حجم امليزانية العمومية والخسائر املرتبطة بها تجعل القطاع‬ ‫الوافدين بنسبة ‪( 51.2%‬عىل أساس سنوي) حتى أغسطس‪/‬آب‪ .‬عىل الرغم‬ ‫املايل يف لبنان أضخم من أن يعوم‪ .‬فقد تجاوزت الخسائر املالية ‪ 72‬مليار‬ ‫من ذلك‪ ،‬ظل صايف الصادرات سالباً‪ ،‬إذ زاد حجم الواردات (‪ ،40.7%‬عىل‬ ‫دوالر‪ ،‬أي ما يعادل أكرث من ثالثة أضعاف إجاميل الناتج املحيل يف عام‬ ‫أساس سنوي‪ ،‬يف فرتة سبعة أشهر من عام ‪ )2022‬بوترية أرسع من زيادة حجم‬ ‫‪ .2021‬وتنبع الخسائر املجمعة عن قطاع عام متعرث يف سداد ديونه‪ ،‬وبنك‬ ‫الصادرات (‪ .)12.7%‬ويُعزى جزء من هذه الزيادة يف الواردات إىل واردات‬ ‫مركزي لديه أكرب مركز احتياطي سلبي يف العامل‪ ،‬ونظام مرصيف متضخم ويف‬ ‫السلع الصناعية (‪ 6.)42.7%‬ومن املحتمل أيضاً أن تكون الزيادات املتوقعة‬ ‫حالة إعسار‪ .‬لذلك‪ ،‬فإن األصول الحالية واملستقبلية التي ميكن أن تعبئها‬ ‫يف الرسوم الجمركية وسعر الرصف الجمريك قد ساهمت يف الزيادة الكبرية يف‬ ‫الدولة بشكل واقعي من أجل عملية اإلنقاذ تبدو ضئيلة للغاية أمام حجم‬ ‫واردات السلع الصناعية ودفعت إىل اكتناز تلك السلع تحسباً لتعديل األسعار‪.‬‬ ‫الثغرات يف امليزانيات العمومية املتشابكة للبنك املركزي والقطاع املرصيف‬ ‫من املتوقع أن يبلغ معدل التضخم ‪ 186%‬يف املتوسط يف عام‬ ‫والدولة‪ .‬وال تساوي األصول اململوكة للدولة والعقارات العامة سوى جزء‬ ‫‪ ،2022‬وهو ما يُعد من بني أعىل املعدالت عىل مستوى العامل‪ .‬وت ُعزى‬ ‫بسيط من الخسائر املالية املقدرة‪ .‬وينطبق األمر نفسه عىل أي إيرادات‬ ‫تلك الزيادة جزئياً إىل تقلص نسبة الواردات عىل أساس األسعار املدعومة‬ ‫محتملة من النفط والغاز‪ ،‬التي ال تزال غري مؤكدة‪ ،‬بل وتحتاج سنوات‬ ‫من مرصف لبنان‪ .‬وتأيت هذه الزيادة يف معدل التضخم عىل الرغم من‬ ‫لتتحقق عىل أي حال‪ .‬وبالنظر إىل التقييم غري املؤكد لهذين األصلني‪ ،‬فإن‬ ‫االنخفاض النسبي يف منو املعروض النقدي مبعناه الضيق يف فرتة مثانية‬ ‫أي خطة تعتمد عليهام لحل األزمة ستفتقر إىل املصداقية وستبوء بالفشل‪.‬‬ ‫أشهر من عام ‪ ،2022‬بسبب التغري يف العالقة الديناميكية بني التضخم‬ ‫إن تعويم القطاع املايل عرب االستعانة بدافعي الرضائب من‬ ‫واالستهالك‪ .‬وترتبط الزيادة يف معدل انتقال تأثري األسعار العاملية إىل‬ ‫يطلب‬ ‫شأنه إعادة توزيع الرثوة من األرس األفقر إىل األرس األغنى‪ ،‬إذ س ُ‬ ‫األسعار املحلية أيضاً بارتفاع مستوى الدولرة يف االقتصاد ‪ -‬ال سيام يف‬ ‫من عامة املواطنني تعويض املساهمني يف املصارف واملودعني األثرياء‪.‬‬ ‫عر سابقاً باللرية اللبنانية بأقل من أسعار الرصف‬ ‫الخدمات التي كانت ت ُس َّ‬ ‫قبل نشوب األزمة‪ ،‬كان ‪ 1%‬من املودعني ميلكون ‪ 50%‬من الودائع يف‬ ‫بالقيمة السوقية والتي تم اآلن تسعريها بالدوالر‪.‬‬ ‫النظام املرصيف اللبناين‪ ،‬يف حني توزعت ملكية ‪ 20%‬من الودائع عىل ‪0.01‬‬ ‫من املرجح أن يؤدي الفراغ السيايس غري املسبوق يف البالد‬ ‫‪ %‬من املودعني‪ .‬إن تركُّز الودائع بشكل كبري بني عدد قليل من األفراد‬ ‫إىل زيادة تأخري التوصل إىل اتفاق بشأن حل األزمات لألزمة وإجراء‬ ‫ذوي املالءة املالية العالية‪ ،‬والذي ميثل إحدى أكرث حاالت عدم اإلنصاف‬ ‫اإلصالحات التي تشتد الحاجة إليها‪ .‬ويشمل هذا اإلجراءات املسبقة‬ ‫يف توزيع الودائع يف التاريخ‪ ،‬يجب أن يُستخدم أساساً العتبارات تحقيق‬ ‫الواردة يف االتفاق الذي أُبرم يف أبريل‪/‬نيسان ‪ 2022‬مع صندوق النقد‬ ‫العدالة واإلنصاف‪ .‬وكام ورد يف عدد الربيع لعام ‪ 2021‬من تقرير مرصد‬ ‫الدويل عىل مستوى الخرباء‪ .‬يف حني ال يُعد الشلل السيايس أمرا ً غريباً عىل‬ ‫االقتصاد اللبناين‪ ،‬والذي يحمل عنوان لبنان يغرق‪ :‬نحو أسوأ ثالث أزمات‬ ‫الساحة اللبنانية‪ ،‬فإن مثن الفراغ املؤسيس بلغ أعىل مستوياته عىل اإلطالق‪.‬‬ ‫عاملية‪ ،‬ال يُعد تعويم القطاع املايل أمرا ً غري قابل لالستمرار فحسب‪ ،‬بل‬ ‫فهو يعوق عمليتي اتخاذ القرار وإقرار اإلصالحات‪ ،‬مام يعمق مشاكل‬ ‫يتعارض أيضاً مع مبادئ إعادة الهيكلة التي تحمي دافعي الرضائب‬ ‫البالد االقتصادية ويزيد محنة الشعب اللبناين املمتدة منذ زمن طويل‪ .‬وال‬ ‫وصغار املودعني‪ ،‬وتعزز تقاسم األعباء عىل نحو منصف‪.‬‬ ‫يزال تنفيذ برنامج صندوق النقد الدويل بعيد املنال ألن السلطات املعنية‬ ‫إن الحل املتمثل يف خطة إنقاذ قامئة عىل ترتيب الدائنني‪ ،‬إىل‬ ‫مل تنجز حتى اآلن عرشة إصالحات مطلوبة عىل الفور‪ .‬يلقي املشهد الحايل‬ ‫جانب إصالحات شاملة‪ ،‬هو الخيار الواقعي الوحيد أمام لبنان لطي‬ ‫يف البالد‪ ،‬من برملان مجزأ وفراغ عىل املستوى الحكومي والرئايس‪ ،‬مبزيد‬ ‫مل خطة اإلنقاذ كبار الدائنني‬ ‫صفحة منوذجه غري املجدي للتنمية‪ .‬وت ُح ّ‬ ‫من الشكوك حول القدرة عىل استكامل اإلجراءات املطلوب اتخاذها عىل‬ ‫واملساهمني التكلفة الرئيسية إلعادة هيكلة القطاع املرصيف‪ ،‬عن طريق‬ ‫الفور والتوصل إىل اتفاق نهايئ يف األشهر القليلة املقبلة‪.‬‬ ‫تخفيض االلتزامات أو إلغائها أو تحويلها إىل حقوق ملكية‪ ،‬أو عن طريق‬ ‫كل هذا‪ .‬ويتيح هذا األمر للمصارف التي تتوافر لها مقومات االستمرار‬ ‫استعادة مالءتها املالية‪ ،‬ويضمن حامية صغار املودعني‪ .‬لقد اتسم منوذج‬ ‫حان الوقت إلعادة هيكلة القطاع املرصيف عىل نحو منصف‬ ‫التنمية يف لبنان بعد الحرب األهلية بوجود روابط قوية بني قطاع املالية‬ ‫العامة والقطاعني النقدي واملايل‪ ،‬مام جعل أحدهام يعتمد بشكل مفرط‬ ‫ال يزال تباين وجهات النظر بني األطراف املعنية الرئيسية بشأن‬ ‫عىل اآلخر‪ ،‬وهو ما أدى يف نهاية املطاف إىل إخفاق النظام‪ .‬ومع التوقف‬ ‫كيفية توزيع الخسائر املالية ميثل العقبة الرئيسية أمام التوصل إىل اتفاق‬ ‫بشأن أجندة إصالح شاملة‪ .‬ويحول هذا الخالف دون إعادة هيكلة شاملة‬ ‫‪ 6‬يشمل هذا األمر الواردات من الفئات التالية‪ :‬الخشب واملطاط واملنتجات‬ ‫للقطاع املرصيف‪ ،‬وهو ما يُعد أمرا ً بالغ األهمية الستعادة استقرار القطاع‬ ‫الكياموية‪ ،‬واملنتجات غري املعدنية‪ ،‬واملنسوجات‪ ،‬والسلع الرأساملية‪،‬‬ ‫املايل وتحقيق التعايف االقتصادي‪ .‬إن املبادئ الخاصة بأفضل املامرسات‬ ‫ومعدات أخرى غري السلع الرأساملية‪.‬‬ ‫العاملية تؤيد اعتامد إسرتاتيجية إلعادة هيكلة القطاع املايل تعرتف‬ ‫‪xiv‬‬ ‫‪LEBANON ECONOMIC MONITOR: TIME FOR AN EQUITABLE BANKING RESOLUTION‬‬ ‫أحسن األحوال‪ .‬ومن الالفت للنظر أن االنكامش الحاصل حتى اآلن ميكن‬ ‫عن سداد الديون السيادية يف مارس‪/‬آذار ‪ ،2020‬انهار التوازن السابق‪.‬‬ ‫مقارنته مبا حدث يف اليمن خالل السنوات األربع األوىل من الحرب‪ .‬إن‬ ‫يجب عىل لبنان أن ينتقل اآلن إىل منوذج جديد للتنمية املستدامة‪ .‬ولن‬ ‫عمق الكساد املتعمد ومدته‪ 8‬يقلالن من قدرة لبنان عىل النمو‪ ،‬إذ يجري‬ ‫يؤدي تأخري يوم املحاسبة عىل حجم الخسائر املالية وتوزيعها القابل‬ ‫استنفاد رأس املال املادي والبرشي واالجتامعي واملؤسيس والبيئي برسعة‬ ‫للتطبيق إال إىل مضاعفة خسائر رأس املال البرشي واالجتامعي يف البالد‪.‬‬ ‫وعىل نحو يتعذر إصالحه‪.‬‬ ‫وكام جاء يف الدعوات السابقة واملتكررة‪ ،‬فإنه يتعني عىل لبنان املسارعة‬ ‫يقدم القسم الخاص الثاين من التقرير تحليالً لعملية الدولرة‬ ‫إىل تبني حل داخيل منصف وشامل يرتكز عىل ما ييل‪ )1( :‬معالجة‬ ‫يف لبنان‪ ،‬ويخلص إىل أن األزمة الحالية ستعزز عىل األرجح مستويات‬ ‫فورية لألرضار التي لحقت بامليزانية العمومية‪ )2( ،‬استعادة السيولة‪،‬‬ ‫الدولرة املرتفعة‪ ،‬حتى بعد تحقيق التعايف‪ .‬تاريخياً‪ ،‬أدت أزمات العمالت‬ ‫(‪ )3‬االلتزام باملامرسات العاملية السليمة لحلول اإلنقاذ القامئة عىل ترتيب‬ ‫املتعددة إىل ازدياد كبري يف عملية الدولرة يف البالد‪ ،‬مع اتساع نطاقها‬ ‫الدائنني (مع البدء مبساهمي املصارف) مام يحمي صغار املودعني‪.‬‬ ‫مبرور الوقت للودائع واإلقراض والدين العام‪ .‬مل يتطور النظام املايل يف‬ ‫لبنان خارج القطاع املرصيف‪ ،‬وحال االفتقار إىل سوق رأس املال دون تطوير‬ ‫أدوات التنويع والتحوط التي كان من املمكن أن تساعد يف تخفيض‬ ‫قسامن خاصان‬ ‫الدولرة أو عكس مسارها‪ .‬وال يزال تطوير أسواق رأس املال أمرا ً بعيد‬ ‫املنال يف ظل الظروف الحالية‪ ،‬كام أنه سيتطلب تحقيق استقرار عىل‬ ‫إن االنكامش الذي شهده لبنان يف إجاميل الناتج املحيل الحقيقي‬ ‫ٍ‬ ‫جديد عىل‬ ‫صعيد االقتصاد الكيل عىل املدى القصري وتبني منوذج من ٍ‬ ‫و‬ ‫وض بالفعل ما تحقق من منو اقتصادي عىل‬ ‫عىل مدى أربع سنوات قد ق ّ‬ ‫املدى الطويل‪.‬‬ ‫مدار ‪ 15‬عاماً‪ ،‬بل ويضعف قدرة البالد عىل التعايف‪ .‬إن عمق االنكامش‬ ‫االقتصادي الرتاكمي يجعل أزمة لبنان املستمرة من بني أسوأ األزمات‬ ‫منذ خمسينيات القرن التاسع عرش‪ 7.‬يقدم القسم الخاص األول من‬ ‫‪ 7‬انظر عدد الربيع لعام ‪ 2021‬من تقرير مرصد االقتصاد اللبناين‪ :‬لبنان‬ ‫التقرير تقييامً لحدة األزمة يف لبنان عرب مقارنتها مبجموعة مختارة من‬ ‫يغرق‪ :‬نحو أسوأ ‪ 3‬أزمات عاملية (الرابط)‬ ‫الدول الهشة واملتأثرة بالرصاعات‪ .‬ويستنتج أن أداء االقتصاد الكيل يف‬ ‫‪ 8‬انظر عدد الخريف لعام ‪ 2020‬من تقرير مرصد االقتصاد اللبناين‪ :‬الكساد‬ ‫لبنان أسوأ من أداء هذه املجموعة املحددة من الدول الهشة واملتأثرة‬ ‫مد (الرابط)‬ ‫املتع َّ‬ ‫بالرصاعات (وهي زميبابوي واليمن وفنزويال والصومال)‪ ،‬أو يضاهيها يف‬ ‫‪Executive Summary‬‬ ‫‪xv‬‬ RÉSUMÉ ANALYTIQUE Évolution économique récente budgétaire global pour 2021 aurait atteint un excé- dent (de 0,7 % du PIB). L’économie continue de se contracter, mais à Témoignage de l’atrophie continue de un rythme un peu plus lent. En raison de données l’économie libanaise, la livre libanaise continue meilleures que prévu, l’estimation de la contraction de se déprécier fortement. La livre libanaise (LBP) du PIB réel pour 2021 est révisée à 7 %, ce qui s’est dépréciée de 137 % en 2020, de 219 % en 2021, est néanmoins considérable, contre 10,4 % dans et au cours des dix premiers mois de 2022, elle a déjà le dernier Rapport de suivi (LEM pour Lebanon perdu 145 % de plus (taux de change effectif moyen Economic Monitor). L’estimation de 21,4 % de selon les estimations de la Banque mondiale)9. Cette contraction du PIB réel en 2020 demeure inchangée. dépréciation constante se produit en dépit des Bien que les arrivées de touristes en 2021 aient interventions de la Banque du Liban (BdL) sur le augmenté de 132 % (en glissement annuel), à partir marché des changes pour tenter de stabiliser le taux d’une faible base induite par la Covid, la reprise n’a de change des billets de banque/taux de change pas été suffisante pour compenser l’augmentation du marché parallèle, au détriment des réserves qui persistante du déficit du compte courant et la baisse s’amenuisent. sensible de la consommation privée. La forte dépréciation de la monnaie con- Les finances publiques se sont amélio- tinue d’entraîner une inflation galopante, à trois rées en 2021, mais uniquement parce que les chiffres depuis juillet 2020, qui touche surtout les dépenses se sont effondrées plus rapidement pauvres et les personnes vulnérables. L’inflation que les recettes publiques. Celles-ci sont pas- a été en moyenne de 150 % en 2021 et de 218 % sées, selon les estimations, d’un niveau déjà faible (en glissement annuel) au premier semestre 2022 de 13,1 % du PIB en 2020 à 6,6 % du PIB en 2021, (atteignant un pic de 240 % – en glissement annuel soit l’un des taux les plus bas au monde. La baisse des recettes ayant toutefois été compensée par une 9 La méthodologie du taux de change moyen (TCM) diminution encore plus importante des dépenses calculé par la Banque est présentée en détail dans le totales (10,5 points de pourcentage – en glisse- Lebanon Economic Monitor, Fall 2020 : The Deliberate ment annuel – pour passer à 5,9 % du PIB), le solde Depression (a). xvii – en janvier 2022). Les pressions inflationnistes ont les arrivées de touristes ont augmenté de 51,2 % (en été exacerbées par la flambée des prix mondiaux des glissement annuel) jusqu’en août. Cependant, les denrées alimentaires depuis le début de la guerre exportations nettes sont restées négatives, car les en Ukraine. Au niveau mondial, le Liban est l’un des importations ont augmenté plus rapidement (40,7 % – pays les plus touchés par l’inflation des prix des en glissement annuel – sur les sept premiers mois de denrées alimentaires en raison de la destruction de 2022) que les exportations (12,7 %). L’augmentation ses réserves stratégiques de blé suite à l’explosion du des importations est imputable en partie à celles port de Beyrouth, de sa forte dépendance à l’égard de biens industriels (42,7 %)10. Les augmentations des importations de blé ukrainien et russe et de la prévues des droits de douane et du taux de change dépréciation de la livre libanaise ; l’inflation des prix des droits de douane ont probablement contribué à des denrées alimentaires a atteint 332 % (en glisse- l’accroissement sensible des importations de biens ment annuel) en juin 2022. L’inflation est une taxe industriels et ont favorisé la thésaurisation de ces particulièrement régressive, qui touche de manière biens en prévision de l’ajustement des prix. disproportionnée les pauvres et les personnes L’inflation devrait atteindre une moyenne vulnérables, d’autant plus que les produits de base, de 186 % en 2022, soit l’une des plus élevées notamment les denrées alimentaires, sont les princi- au monde, en partie en raison de la diminution paux vecteurs de l’inflation globale. de la part des importations sur la base des taux Il est surprenant que, pour un pays en subventionnés de la BdL. Ce taux d’inflation élevé proie à une dépression prolongée et profonde survient malgré une diminution relative de la crois- et à une défaillance de sa dette souveraine, le sance de la masse monétaire étroite sur les huit Liban continue d’afficher un déficit de la balance premiers mois de 2022, en raison d’un changement courante appréciable. Le déficit de la balance dans la relation dynamique entre l’inflation et la courante a augmenté entre 2020 et 2021 (de 9,3 à dépréciation. L’augmentation de la transmission de 12,5  % du PIB, respectivement), et devrait encore se l’inflation est également liée à des niveaux plus élevés creuser en 2022. Les données douanières indiquent : de dollarisation de l’économie, notamment pour les i) une facture d’importation d’énergie plus élevée (en services qui étaient auparavant facturés en LBP à des dollars), la baisse des volumes étant compensée par taux de change inférieurs à la valeur du marché et qui la flambée des prix mondiaux de l’énergie, et ii) une sont désormais dollarisés. augmentation nominale considérable des importa- Un vide institutionnel sans précédent tions non énergétiques (de 21,1 % en 2021). Le déficit retardera probablement davantage tout accord de la balance courante continue d’être financé par sur la résolution de la crise et les réformes indis- les réserves de change brutes utilisables restantes à pensables, y compris les mesures préalables dans la banque centrale et par une économie monétaire le cadre de l’accord conclut au niveau des services omniprésente, dans laquelle les importateurs comp- du FMI en avril 2022. Si le Liban est coutumier de la tent également sur l’autofinancement (en espèces) paralysie politique, le prix d’un vide institutionnel n’a pour pouvoir effectuer des transferts directs afin de jamais été aussi élevé, car il entrave la prise de déci- financer les importations. sion et la ratification des réformes, aggravant ainsi les difficultés économiques à long terme du pays et la situation critique de son peuple. Un programme Perspectives et risques du FMI reste insaisissable car les autorités doivent encore mener à bien dix réformes préalables. Un Le PIB réel devrait encore se contracter de 5,4 % en 2022, si la paralysie politique se poursuit 10 Cela comprend les importations des catégories suivantes : et si aucune stratégie de relance n’est mise en bois, caoutchouc et produits chimiques ; produits non œuvre. L’indice BLOMPMI a légèrement augmenté métalliques ; textiles ; biens d’investissement ; et à 48,5 au cours des neuf premiers mois de 2022 et équipements autres que les biens d’investissement. xviii LEBANON ECONOMIC MONITOR: TIME FOR AN EQUITABLE BANKING RESOLUTION parlement fragmenté, associé à un vide gouverne- l’évaluation incertaine de ces deux actifs, tout plan de mental et présidentiel, jette un doute supplémentaire résolution de la crise reposant sur ceuxci manquerait sur la capacité à achever les mesures préalables et à de crédibilité et échouerait. obtenir un accord final dans les prochains mois. Un plan de renflouement du secteur financier par les contribuables entraînerait une redistribution de la richesse des ménages les plus L’urgence d’une résolution bancaire pauvres vers les plus riches, car le public serait équitable invité à dédommager les détenteurs d’actions des banques et les riches déposants. Avant la Les divergences de vues entre les principales crise, 50 % des dépôts dans le système bancaire liba- parties prenantes sur la manière de répartir les nais étaient détenus par 1 % des déposants, 20 % des pertes financières demeurent le principal obstacle dépôts étant détenus par 0,01 % des déposants. La à la conclusion d’un accord sur un programme forte concentration des dépôts entre les mains d’un complet de réforme. Une telle discorde empêche petit nombre de particuliers fortunés, qui constitue la résolution du problème du secteur bancaire, qui l’une des distributions de dépôts les plus inégales est essentielle pour rétablir la stabilité du secteur de l’histoire, doit servir de base à des considérations financier et la reprise économique. Les principes d’équité et de justice. Comme cela a été soutenu dans issus des meilleures pratiques mondiales préconisent le numéro du printemps 2021 du Rapport de suivi de une stratégie de redressement du secteur financier la situation économique intitulé Lebanon Sinking (to qui reconnaît et traite d’emblée les pertes importantes the Top 3), non seulement le renflouement du secteur du secteur, respecte la hiérarchie des créances, financier n’est pas viable, mais il est également protège les petits déposants et s’abstient de recourir incompatible avec les principes de restructuration aux ressources publiques. Cependant, les principales qui protègent contribuables et petits déposants et parties prenantes au Liban s’opposent fermement favorisent un partage équitable des charges. à une telle résolution, appelant l’État à assumer la Une solution de mise à contribution, basée responsabilité de la crise actuelle et à privatiser les sur une hiérarchie des créanciers, et accompa- actifs publics et/ou à puiser dans les futures recettes gnée de réformes globales, représente la seule publiques pour renflouer le secteur financier. option réaliste pour que le Liban tourne la page La taille du bilan et les pertes associées sur son modèle de développement défectueux. font que le secteur financier libanais est trop gros Un plan de mise à contribution fait supporter aux pour être renfloué. Les pertes financières dépas- grands créanciers et actionnaires l’essentiel du coût sent 72 milliards de dollars, ce qui équivaut à plus de de la restructuration des banques, en dépréciant, trois fois le PIB en 2021. Les pertes combinées provi- annulant et/ou convertissant les dettes en capitaux ennent d’un secteur public en défaut, d’une banque propres ; cela permet aux banques viables de centrale détenant la plus grande position de réserves retrouver leur solvabilité et assure la protection des négatives au monde et d’un système bancaire surdi- petits déposants. Le modèle de développement mensionné et insolvable. Par conséquent, l’ampleur postguerre civile du Liban se caractérise par des liens des trous dans les bilans entrelacés de la banque étroits entre les secteurs fiscal, monétaire et finan- centrale, du secteur bancaire et de l’État dépasse cier, rendant les uns trop dépendants des autres et les actifs actuels et futurs que l’État pourrait raison- conduisant finalement à une défaillance systémique. nablement mobiliser pour un renflouement. Les actifs Avec le défaut de paiement de la dette souveraine appartenant à l’État et les biens immobiliers publics de mars 2020, l’équilibre antérieur s’est effondré. Le ne valent qu’une fraction des pertes financières esti- Liban doit maintenant passer à un nouveau modèle mées, tout comme les revenus potentiels du pétrole de développement durable. Tout retard dans la prise et du gaz, qui sont encore incertains et ne seront pas en compte de l’ampleur et de la répartition viable des disponibles avant plusieurs années. Compte tenu de pertes financières ne fera qu’aggraver les pertes en Résumé analytique xix capital humain et social. Comme cela a été demandé et la durée de la dépression délibérée12 réduisent à maintes reprises, le Liban doit adopter de toute les potentialités de croissance du Liban, car son urgence une solution nationale, équitable et globale capital physique, humain, social, institutionnel et qui repose sur : i) le traitement immédiat des dépré- environnemental s’épuise rapidement et de manière ciations du bilan, ii) le rétablissement des liquidités, potentiellement irrémédiable. et iii) l’adhésion à des pratiques mondiales saines de Le Dossier spécial II présente une analyse mise à contribution fondées sur une hiérarchie des de la dollarisation au Liban, et conclut que la crise créanciers (en commençant par les actionnaires des actuelle va probablement renforcer les niveaux banques) qui protège les petits déposants. élevés de dollarisation, même après la reprise. Traditionnellement, les crises monétaires multiples ont conduit à une hystérésis de la dollarisation dans Dossiers spéciaux le pays, son étendue s’élargissant au fil du temps pour les dépôts, les prêts et la dette publique. Il apparaît que La contraction de quatre ans du PIB réel du Liban le système financier du Liban n’a pas été développé a déjà réduit à néant 15  années de croissance audelà du secteur bancaire, et que l’absence d’un économique et compromet le potentiel de marché des capitaux empêche le développement redressement du pays. L’ampleur de la contraction d’instruments de diversification et de couverture qui économique cumulée place la crise actuelle du auraient pu contribuer à réduire ou à inverser la dol- Liban parmi les pires depuis les années 185011. Le larisation. Le développement des marchés de capitaux Dossier spécial I évalue la gravité de la crise du reste irréalisable dans les conditions actuelles et néces- Liban en le comparant à une sélection d’États fragiles sitera une stabilité macroéconomique à court terme et et touchés par un conflit (EFC). Il conclut que les un nouveau modèle de croissance à long terme. résultats macroéconomiques du Liban sont pires – ou au mieux égaux – à ceux de ce groupe précis d’EFC (Zimbabwe, Yémen, Venezuela et Somalie). Il 11 Voir Lebanon Economic Monitor, Spring 2021 : est frappant de constater que la contraction observée Lebanon Sinking (to the Top 3) (a). à ce jour est comparable à celle du Yémen pendant 12 Voir Lebanon Economic Monitor, Fall 2020 : The les quatre premières années de guerre. La gravité Deliberate Depression (a). xx LEBANON ECONOMIC MONITOR: TIME FOR AN EQUITABLE BANKING RESOLUTION 1 THE POLICY CONTEXT I n July 2022, the World Bank reclassified of ten prior actions (PAs). To date, limited progress in Lebanon as a lower-middle income country their implementation has been made since the signa- (LMIC), down from an upper-middle income ture of the preliminary agreement. The final agreement country (UMIC). This makes Lebanon one of only is also subject to the confirmation of international three countries downgraded to a lower income partners’ financial support to meet Lebanon’s external category—the other two being Zambia and Palau. financing needs under the Program. Lebanon had held its UMIC position for almost 25 years. Income classification is based on the country’s Gross National Income (GNI) per capita of 13 Official national accounts data are lagging (2020 is the the previous year, i.e., Lebanon’s new classification is latest official release). based on its 2021 GNI per capita, which is estimated 14 Population of Lebanon includes Syrian refugees residing at US$3,450 per capita.13 While real GDP has been in Lebanon. As of 2021, the population of Lebanon is contracting for the past four years, the contraction 6.77 million. in real GDP per capita has spanned eleven years 15 The comprehensive reform program consists of five key reform pillars: (i) restructuring the financial sector to date. The decline has been driven most recently to restore banks’ viability and financial intermediation by the economic crisis, and prior to that, by low functions; (ii) creating fiscal space by restructuring public growth since 2011 and a 36 percent increase in the debt and placing it on a sustainable footing; (iii) reforming population between 2010 and 2021 (a denominator- state-owned enterprises, particularly Électricité du led effect).14 Liban (EdL); (iv) modernizing the central bank (Banque On April 7, 2022, the Government of du Liban, BdL), governance and accountability arrangements and strengthening governance, anti- Lebanon (GoL) and the IMF announced a staff-level corruption, and anti-money laundering /combating agreement (SLA) on a US$3 billion, 46 months the financing of terrorism (AML/CFT) frameworks; and Extended Fund Arrangement (EFF).15 Securing IMF (v) establishing a credible and transparent monetary and Board approval for the EFF will require the completion exchange rate system. 1 The May 2022 Parliamentary elections overhaul their impaired balance sheets. The Lebanon produced a hung parliament with fragmented Economic Committees,20 have also proposed an eco- blocs and seats, challenging the ability to form a nomic recovery plan that entails a state contribution stable majority. Non-party affiliates have garnered of US$ 30 billion21 to recover 74 percent of the funds a significant presence. Prime Minister Mikati, whose of bank depositors. The plan proposes that the state government went into caretaker mode upon parlia- establishes a holding company of around 15 state- mentary elections, was re-appointed as prime minister owned enterprises, facilities and assets. The holding designate in June 2022, with a new government yet company will be managed by the private sector for a to be formed. Moreover, President Aoun’s term period of 10–12 years to repay deposits exceeding ended on October 30th, leaving a void at the top as US$100,000. Such a plan (unrealistically) anticipates the parliament has so far been unable to agree on his the gradual recovery of big deposits through revenues successor. Governmental and presidential vacuum, from state asset investments belonging to all citizens, a resulting in an unprecedented institutional vacuum, quasi-solution that constitutes a bailout of the financial may sow the seeds for further discord and consider- sector’s shareholders and big depositors and goes ably complicate the political process. against equitable burden sharing. In October 2022, a historic agreement On September 26, the Lebanese parliament between Lebanon and Israel, negotiated through ratified a long overdue government budget for the United States, to delimit their maritime borders 2022. The constitutional deadline to pass the budget has been reached. The agreement will likely bring law was end-January 2022. The budget calculates relative stability on the security front and will allow Lebanon to begin the process of gas exploration. Even if Lebanon’s offshore gas reserve is deemed 16 The IMF (2014) estimate the revenues from Liquid commercially viable, it will take multiple years before Natural Gas (LNG) to amount to, at the peak, 4 percent the nascent industry becomes revenue generating, of GDP under a baseline production profile. The same study estimates LNG revenues to GDP to stand at 7 denting considerations to recover financial sector percent of GDP at the peak of production under a losses from those revenues.16 In addition, an appro- hypothetical production profile assuming a long reserve priate governance and regulatory framework in a horizon and increased production. context of multiple governance challenges, will need 17 See for example: Jamali, I. and Le Borgne, E., 2014. A to be established to manage potential hydrocarbon Lebanon Sovereign Wealth Fund: Preliminary Recom- wealth effectively and adequately.17 mendations. Assadissa: A Journal of Public Finance & State Modernization, (5), pp.68–88. Various stakeholders (including ABL and 18 In an open letter to the IMF’s Head of Mission, an advisor to Lebanon’s Economic Committees) continue to ABL specified ABL’s preferred distribution of losses based demand the use of public assets and/or future gov- on the following five pillars: (1) Mobilization of state assets ernment revenues to bail out the financial sector.18 (up to c. US$20 billion); (2) Use of BdL’s gold reserves (up ABL—representing almost all of Lebanon’s domestic to c. US $15 billion); (3) Reversal of post-October 2019 financial institutions—remains opposed to important book-entry FX transactions (up to c. US $10–15 billion); (4) Lirafication of deposits consistent with decreasing global principles of financial sector restructuring inflation (up to c. US $30 billion); and (5) Recognition of that include bail in solutions based on a hierarchy seigniorage profits accrued since 2020 (up to c. US $5 of creditors, starting with banks’ shareholders. The billion). This position is strongly opposed to the Financial outgoing Diab Government calculated losses in the Recovery Plan prepared by the Diab Government. financial sector at US$72 billion, which is close to three 19 This would be subject to a bank-by-bank assessment but times (2022) GDP and, thus, is expected to wipe out total equity of the Lebanese banking system at the onset of the crisis amounted to US$22 billion. shareholders’ equity of many banks.19 Almost three 20 A grouping of Lebanon’s main private sector years into the crisis, ABL continues to advocate for businessmen and owners of major firms. mechanisms that incorporate state owned enterprises 21 Equivalent to roughly three times the present value of (SOEs), gold reserves, and public real estate in order to state assets. 2 LEBANON ECONOMIC MONITOR: TIME FOR AN EQUITABLE BANKING RESOLUTION expenditures at LBP41 trillion and revenues at LBP30 plan. The prime minister subsequently explained that trillion, for an overall fiscal deficit of LBP11 trillion. The the roll out of a new official exchange rate of 15,000 exchange rate used to calculate tax revenues (including LBP/US$ will happen gradually, with preliminary the customs’ dollar tax) was set at 15,000 LBP/US$. exceptions to include banks’ balance sheets and The budget only came into effect on November 15th, housing loan repayments to which the old official following its publication in the Official Gazette, less rate would still apply. He stated that the new official than two months before the end of the year.22 The rati- exchange rate will initially only apply to customs duties fied budget constitutes a missed opportunity for more on imports and to VAT on those imports, collected at progressive revenue measures. A change in approach customs (as ratified by parliament in the 2022 budget). is necessary to devise a credible and balanced budget for 2023, based on realistic macroeconomic assump- tions and a unified exchange rate. 22 The outgoing president has refused to sign off on the On September 28, the Minister of Finance government budget law prior to the end of his tenure; announced plans to (selectively) increase the however, as stipulated in article 57 of the constitution, the 2022 budget will automatically come into force if the official exchange rate from 1,507 to 15,000 LBP/ president does not sign or return the law to parliament US$ starting in November 2022. Shortly after, the within one month of its issuance. When the budget minister of finance clarified that the step was condi- comes into force, it is considered applicable for the tioned on the approval of a comprehensive recovery remainder of the year (i.e. cannot be retroactive). The Policy Context 3 2 RECENT MACRO- FINANCIAL DEVELOPMENTS Output and Demand suffered sizable losses, due to a combination of the financial crisis and COVID-19 lockdown measures; We are revising (upward) our estimated the BTA Fransabank retail trade index declined by contraction in real GDP for 2021 to a nonetheless 59.5 percent (in real terms) during 2021. significant 7 percent (from 10.4 percent). Our On the demand side, net exports continue 21.4 percent estimated contraction in real GDP in to be the only positive contributor to growth in 2020 remains unchanged (Figure 1). The slightly 2021 (Figure 2).24 This is driven by an improvement slower contraction is supported by high frequency in trade in services, led by tourism. Tourist arrivals indicators: the real estate sector witnessed some surged by 132 percent (yoy), while hotel occupancy progress, as construction permits (an indication rates (published by Ernst & Young) averaged 42 per- of future activity) increased by 74.3 percent (yoy). cent in 2021, a 120 percent increase from an average However, this increase occurred largely from a low occupancy rate of 19 percent in 2020. This pattern base effect, in part due to Covid-related stoppages continued in 2022 as tourist arrivals increased by in the sector-construction permits over 12M-2021 51.2 percent (yoy) in 8M-2022, compared to the remained 15 percent below their seven-year average for the same period (12M-2013 … 12M-2019). Real estate sales thrived in 2020 and 2021 as some 23 The financial sector facilitated real estate purchases depositors managed to capitalize on their otherwise with pre-October 2019 dollar deposits circumventing untransferable bank deposits.23 The BLOM-PMI index, conditions of informal capital controls (and therefore, which captures private sector activity (<50 represents lack of alternatives to get those deposits out), leading to an increase in such purchases. a contraction of activity), still points to contraction but 24 It is important to note, that over the past couple of notched up to 46 in 2021, compared to 41.1 in 2020, years, net exports contributed positively to growth due and inching up to 48.5 over 9M-2022 compared to a collapse in domestic demand, which is historically to 45.8 over 9M-2021. The retail sector, however, concentrated on imported goods. 5 FIGURE 1 • Lebanon’s Economy Contracted for a FIGURE 2 • Net Exports Have Been the Sole Fourth Consecutive Year in 2021 Positive Contributor to Real GDP since 2019 Real GDP Growth (%) 20 Real GDP Components 16.4 15 15 11.3 10.8 10.2 10 9.1 9.3 8.1 8.0 7.5 10 5 6.4 3.9 3.8 3.8 3.9 0 3.4 5 2.5 2.5 2.7 1.7 1.5 1.6 1.1 0.8 0.9 0.6 –5 0 –10 –0.8 –1.7 –5 –15 –20 –7.0 –7.2 –10 –25 –15 –30 –20 –35 2013 2014 2015 2016 2017 2018 2019 2020e 2021e 2020e –21.4 –25 Private Consumption Government Consumption 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2021e Gross Fixed Capital Investment Net Exports Statistical Discrepancy Sources: CAS and WB staff calculations. Sources: CAS and WB staff calculations. same period in 2021. Private consumption, which Expenditures continued to benefit from low debt ser- averaged 92.3 percent of GDP between 2015 and vice (a consequence of the default on foreign debt); 2018, has taken a severe blow since the start of the a 71.1 percent (yoy) decline in interest payments on crisis, with Byblos Bank/AUB’s consumer confidence foreign debt led to a 10.6 percent (yoy) fall in debt index declining by 65.1 percent (yoy) in the first nine service, in 2021. A favorable arrangement between months of 2020 (9M-2020; latest available). the Government and BdL on treasury bonds (TBs) coupon payments further reduced interest expendi- tures; as part of fiscal relief for the Government, BdL Fiscal Developments does not receive coupon payments on its holding of Treasury Bonds.25 Primary spending also fell over the Public finances improved in 2021 as spending same period, decreasing by 8.3 pp (yoy) to 5.6 per- collapsed faster than revenue generation. cent of GDP, driven by a 6.5 percent nominal decline Revenues are estimated to have declined from an in primary spending (i.e., the numerator) as well as an already low 13.1 percent of GDP in 2020 to 6.6 percent inflation-driven increase in nominal GDP (Figure 8). of GDP in 2021, among the lowest rates globally. When netting out transfers to the state-owned EdL, This was more than offset by a larger decrease in which fell by 0.9 pp of GDP over the same period,26 total expenditures, falling by 10.5 pp (yoy) in 2021 to primary spending declined by 7.5 pp of GDP (yoy). 5.9 percent of GDP. As a result, the fiscal balance is In fact, with inflation averaging 150 percent (yoy) in estimated to have recorded a surplus of 0.7 percent of GDP for the first time in decades, compared to a 25 This, however, pushes the cost of domestic debt to BdL’s deficit of 3.3 percent of GDP in 2020, and despite income statement and balance sheet, both of which are a denominator-led effect (inflationary increase of in dire conditions. nominal GDP). The primary balance is estimated to 26 In March 2021, and in response to a request from the have reached 1.7 percent of GDP in 2021, up from Ministry of Energy and Water for an allocation in the amount of LBP 900 billion (equivalent to US$600 million –0.8 percent in 2020. at the official exchange rate), Parliament ratified only A passive approach to fiscal policy led to a LBP300 billion. Power generation was subsequently cut substantive decrease in primary spending while back to as much as 2 hours per day, as power cuts were sovereign default curtailed debt service payments. increasingly used as a saving tool. 6 LEBANON ECONOMIC MONITOR: TIME FOR AN EQUITABLE BANKING RESOLUTION BOX 1: GOVERNMENT BUDGET 2022 On September 26, the Lebanese parliament ratified a long overdue government budget for 2022. The constitutional deadline to pass the budget law was end-January 2022. The 2022 budget law targets an overall fiscal deficit of 2 percent of GDP. The budget only came into effect on November 15th, following its publication in the Official Gazette. Although the budget reflects an expansionary fiscal policy compared to 2021 (table 2), it is expected to have limited impact on public finances in the remainder of 2022 with only six weeks left in the year. However, the 2022 budget could have a considerable impact on public finances in 2023, as in the absence of a ratified 2023 budget, spending follows the 1/12th rulea based on the last approved budget law, i.e. spending in 2023 will be based on the budget law of 2022 until a 2023 budget comes into force. The budget law relies on direct and indirect taxes to boost revenues. The budget projects an increase in customs duties on imported goods ( 10 percent on imports with a local equivalent). The budget also adjusts the exchange rate used to calculate the customs duties on imports, also known as the “customs dollar”, now set at 15,000 LBP/US$. The new exchange rate will also apply to VAT on import goods collected at customs. . Moreover, income, profit, property and capital gain taxes brackets have been adjusted, and public service fees have been raised. Departure taxes are now to be paid in US$ and entrance fees for non-Lebanese entering via a land border have been introduced. On the expenditure side, the budget law proposes a social benefits program for civil servants. The current salaries of public servants have been used as a basis to calculate the value of the temporary social benefit, ranging between LBP5 million to LBP12 million per month. The 2022 budget law does not reflect clear policy objectives to address the root causes of the multi-pronged crisis. The budget law is lacking any structural transformation or reforms consistent with a new and viable economic model. The budget process remains an accounting exercise (summation of cost of inputs of public institutions, and deeply seated regressive tax revenues). Comprehensive tax reform and an overhaul of the taxation system in Lebanon starting with more targeted, direct, and progressive tax increases is crucial for addressing widening inequality. Notably, the budget law does not include the one-time wealth tax previously proposed by the former government (2020–2021). Future budgets need to be informed by a review and rationalization of public expenditures and be supported by comprehensive tax reform that promotes a shift towards more direct and progressive taxation. TABLE 1 • Fiscal Balance (2020–2022) 2020 2021 2022 Budget LBP Bln % of GDP LBP Bln % of GDP LBP Bln % of GDP* Total Expenditures 19,236 16.4% 17,861 7.5% 40,870 7% Total Revenues 15,341 13.1% 20,263 6.6% 29,986 5% Fiscal Balance –3,895 –3.3% 2,401 0.9% –10,884 –2% * Calculations based on World Bank projections of 2022 GDP. a The 1/12th rule stipulates that for each month of the new year that passes without an updated budget, the government can spend one-twelfth of the annual amount allocated in the last approved budget. 2021, real (non-EdL related) primary spending over exchange rate of 1,500 LBP/US$. This is further this period contracted by 61.4 percent.27 compounded by lower collection of taxes on interest Significant tax revenue losses and an income due to declining deposits and a delay in tax inflation-driven increase in nominal GDP con- declarations (granted by the tax authorities during the tinue to drive a sharp decrease in revenues as a early COVID pandemic period). percentage of GDP (Figure 5). While the severe con- Economic contraction and currency traction in economic activity has depressed revenues, depreciation are contributing to an already tax revenues have been further dampened by tax unsustainable debt dynamic. The debt-to-GDP ratio evasion due to (1) a significant shift to a cash-based economy, (2) distrust in the State, and (3) weakened 27 The sharp decline in primary spending reflects a capacity in the revenue administration; in addition collapse in public service delivery, which is detailed in to calculating VAT and customs duties at the official the World Bank’s 2022 Lebanon Public Finance Review. Recent Macro-Financial Developments 7 Spending Collapsing Faster than FIGURE 3 •  Revenues Falling at a Slower Pace FIGURE 4 •  Revenue Generation Inducing Positive than Expenditures Fiscal Balance in 2021 40 Fiscal Aggregates (% of GDP) 35 5 3 30 0 –3 25 % of GDP –5 –8 20 Percent (%) –10 15 –13 –15 10 –18 –20 5 –23 –25 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 –28 1991 2019 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2021e Debt Service Transfers to EdL Overall Fiscal Balance Capital Expenditures Other Expenditures Primary Fiscal Balance, Excluding Interest Payments Sources: Lebanese authorities and WB staff calculations. Sources: Lebanese authorities and WB staff calculations. Revenue Components Falling across FIGURE 5 •  FIGURE 6 • Valuation Effects from Exchange Rate the Board Causes a Decrease in Total Depreciations Will Pressure the Debt- Revenues (as a % of GDP) to-GDP Ratioa 30 Gross Public Debt 100 200 25 90 180 80 160 20 70 140 Percent of GDP (%) % of GDP US$ Billion 60 120 15 50 100 10 40 80 30 60 5 20 40 10 20 0 0 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 1991 1994 1997 2000 2003 2006 2009 2012 2015 2018 2021e VAT Customs External Public Debt (US$ bln) Domestic Public Debt (US$ bln) Transfers from Telecom Surplus Treasury Receipts Gross Public Debt (US$ bln) Gross Public Debt as a Other Revenues Percentage of GDP (rhs, %) Sources: Lebanese authorities and WB staff calculations. Sources: Lebanese authorities and WB staff calculations. a To convert domestic debt to US$, we use the World Bank Average Exchange Rate for 2020 and 2021, estimated at LBP3,688/US$ and LBP11,755/US$, respectively. is estimated to have reached 172.5 percent in 2021, to the currency depreciation, leaving a larger debt-to- a slight decrease from the estimated 179.2 percent GDP ratio in 2020 and 2021 respectively (Figure 6).28 in 2020. The sharp depreciation in the local currency continues to lower the dollar value of total debt (the 28 Out of the total debt stock, an estimated 86% of the total numerator in the debt-to-GDP ratio); this, however, is debt stock is denominated in foreign currency in 2020, offset by a lower denominator, GDP in US$, due also and 80% in 2021. 8 LEBANON ECONOMIC MONITOR: TIME FOR AN EQUITABLE BANKING RESOLUTION Whereas the surge in inflation is rapidly eroding the 7M-2022 respectively. Energy imports, representing real value of domestic debt, the sharp depreciation of 29 percent of the total nominal value of imports (of the currency continues to make Lebanon’s sovereign goods), increased in nominal value by 40 percent debt burden more unsustainable.29 (yoy) in 7M-2022. However, their weight decreased by 27 percent, revealing a shrinkage in volume of those imports. As such, the impact of surging global The External Sector energy prices has outweighed the demand elasticity effect. Similarly, imports excluding energy increased The current account (CA) deficit-to-GDP witnessed (nominally) by 31.8 percent. This included yoy a 34 percent increase in 2021 compared to increases of 42.7 and 10.6 percent in imports of 2020,despite a post-COVID induced rebound in industrial goods31 and food products,32 respectively, tourism. This was driven by (i) a widening trade-in- in 7M-2022, compared to 7M-2021. Anticipated goods deficit led by increasing imports; and (ii) the increases in custom duties and the customs duties crashing dollar value of GDP—a falling denominator exchange rate have likely contributed to the substan- effect due to the depreciating exchange rate. A 20.6 tive increase in imports of industrial goods and have percent nominal expansion in imports outweighed driven the hoarding of those goods in anticipation of a 9.6 percent increase in exports in 2021. Customs the price adjustment.33 data suggest: (i) a higher energy import bill (in US$) The sudden stop in capital inflows, coupled due to surging global energy prices outweighed the with a large CA deficit, has steadily depleted effect of lower volumes imported; and (ii) non-energy BdL’s gross FX reserves—net FX reserves have imports also increased (nominally) by 21.1 percent. long been negative (Figure 7). By end-August 2022, The tourism sector witnessed a rebound in 2021, gross FX reserves (excluding gold reserves) reached albeit from a low threshold (covid-induced low base), US$14.8 billion, declining by US$23 billion since improving the trade-in-services balance. Moreover, the onset of the crisis in October 2019. BdL’s gross net remittances are estimated to have increased position includes Lebanese Eurobonds (currently in from 10.3 percent of GDP in 2020 to 15.9 percent of sovereign default status) and an unpublished amount GDP in 2021, due largely to a sharp decline in US$ lent to banks. The required reserves on banks’ GDP (a denominator effect) and a 9 percent nominal customer’s FX deposits are estimated at around increase in net remittances in 2021. Overall, the CA deficit reached 12.5 percent of GDP in 2021, up from 29 For debt calculations, we use the Bank-calculated a 9.3 percent of GDP in 2020, yet still lower than the Average Exchange Rate (AER) whose methodology is medium-term (2013–2019) average of 22.6 percent detailed in the Lebanon Economic Monitor, Fall 2020: of GDP. This sizable current account deficit continues The Deliberate Depression. to be predominantly financed from remaining foreign 30 Gross FX reserves (excluding gold reserves) declined by exchange reserves at the central bank30 coupled with US$6.3 billion in 2021. a growing cash economy, in which importers must 31 This includes imports of the following categories: Wood, Rubber and Chemical Products; Non-Metallic Products; rely on cash to access credit lines for imports that Textiles; Capital Goods; and Equipment Other than now require 100 percent cash collateral. Capital Goods. High frequency data support a widening 32 This includes imports of the following categories: of the trade-in-goods deficit in 2021, extending Agricultural Products and Animals; and Food Industry to 2022, driven by a growth in imports out- Products. pacing that in exports. According to customs 33 Customs data for the combination of (i) vehicles, aircraft, vessels, and transport equipment; and (ii) machinery and data for merchandise goods, imports grew by electrical instruments, reveal a 117 percent (yoy) increase 20.6 percent in 2021, and 34.1 percent (yoy) in in 7M-2022, compared to 7M-2021; with the imports of 7M-2022, which more than offset a 9.6 percent the former increasing by 95.1 percent and the latter by and 12.7 percent increase in exports in 2021 and 141 percent. Recent Macro-Financial Developments 9 A Steady Depletion in the Gross Foreign Exchange Position at BdL FIGURE 7 •  Gross Reserves at BdL 50,000 45,000 40,000 35,000 US$ Million 30,000 25,000 20,000 15,000 10,000 5,000 0 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 Apr-19 Jul-19 Oct-19 Jan-20 Apr-20 Jul-20 Oct-20 Jan-21 Apr-21 Jul-21 Oct-21 Jan-22 Apr-22 Jul-22 Foreign Currencies Foreign Securities Gross FX Reserves Compulsory FX Reserve Sources: CAS and WB staff calculations. US$14 billion.34 BdL’s gross position differs widely Rate; or parallel market rate) averaged 20,700 LBP/ from its net reserves (i.e., gross FX reserves at the US$ in H2-2021, primarily driven by the disorderly central bank net of FX liabilities to others) and con- removal rationing of the FX subsidy provided by BdL trary to most central banks, BdL does not publish net to fuel importers. Despite BdL’s FX interventions to reserves, which are estimated to be highly negative attempt to stabilize the BNR using its gross reserves (in excess of US$60 billion).35 starting in December 2021, the LBP has continued The Ukraine war continues to add to to steadily depreciate. The depreciation of the LBP Lebanon’s woes. Lebanon is highly dependent on accelerated since February 2022, with the BNR imports for wheat consumption, and these are almost breaching LBP40,000/US$ by October 2022. The entirely sourced from Ukraine and Russia, which AER depreciated by 145 percent (yoy) over 10M- supplied 96 percent of the country’s needs in 2021. 2022—from an average of LBP10,372/US$ over Wheat prices are expected to increase by 40 percent 10M-2021 to LBP25,407/US$ over 10M-2022. in dollar terms in 2022. Lebanon has to quickly find (Figure 8). alternative sources for its wheat imports, to avoid a food security crisis. Moreover, oil price spiked with the beginning of the war and is expected to average 34 In June 2021, BdL lowered required reserve ratio on around US$100/bbl in 2022, up from US$70/bbl in dollar deposits from 15 percent to 14 percent. 2021.36 As an energy importer, the surge in global 35 World Bank estimates, also see similar estimates in: energy prices negatively impacts Lebanon’s balance “Mapping out the path to the Lebanese Economic of payments, exacerbating already existing, crisis Recovery”, Goldman Sachs International, 2021; “Fitch Downgrades Lebanon to ‘CC’”, Fitch Ratings, 2019; related exchange market pressures.37 Moubayed, A., & Zouein, G. (2020). 36 World Bank Commodity Markets Outlook, October 2022. 37 In 2020—when average crude oil price was US$41.3/ Money and Banking barrel—the country imported US$3.2 billion in energy products, amounting to about 30 percent of the country’s The Lebanese Pound depreciated by 145 percent merchandize import bill. 38 The AER is derived by applying consumption-based in the first ten months of 2022, compared to weights on the official, the platform and the US$ 219 percent in 2021 and 137 percent in 2020 banknote exchange rates. For a detailed derivation (Figure 8)—using the World Bank-estimated Average please refer to: World Bank (2020), Lebanon Economic Exchange Rate (AER).38 The BNR (i.e., the Banknote Monitor: The Deliberate Depression, Fall 2020. 10 LEBANON ECONOMIC MONITOR: TIME FOR AN EQUITABLE BANKING RESOLUTION A Sharp Depreciation in the Exchange Rate along with Surging Inflation and Narrow Money FIGURE 8 •  3,000 200% 180% 2,500 160% Index (Aug 2019 = 100) 2,000 140% Percent (%) 120% 1,500 100% 80% 1,000 60% 500 40% 20% 0 0% Aug-19 Sep-19 Oct-19 Nov-19 Dec-19 Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20 Sep-20 Oct-20 Nov-20 Dec-20 Jan-21 Feb-21 Mar-21 Apr-21 May-21 Jun-21 Jul-21 Aug-21 Sep-21 Oct-21 Nov-21 Dec-21 Jan-22 Feb-22 Mar-22 Apr-22 May-22 Jun-22 Jul-22 Aug-22 Sep-22 US$ Banknote Rate WB Average Exchange Rate Inflation Currency in Circulation CPI-Exchange Rate Pass Through (rhs ) Sources: CAS and WB staff calculations. Inflation in Basic Items Is a Key Driver of Overall Inflation, Hurting the Poor and FIGURE 9 •  the Middle Class Contributions to Overall Inflation in 9M-2022 230 180 130 Percent 80 30 –20 Headline Inflation Growth Food & Non-alcoholic Beverages Transportation Clothing & Footwear Furnishings, Household Equipment Water, Electricity, Gas, & Other Fuels Health Alcoholic Beverages & Tobacco Communication Owned Occupied Actual Rent Education Other Sources: CAS and WB staff calculations. Inflation averaged 150 percent in 2021 Inflation is a highly regressive tax, dispro- and reached a high of 240 percent (yoy) in portionally affecting the poor and vulnerable, January 2022, primarily driven by an increase in and more generally, people living on fixed the exchange rate pass-through. Increasing global incomes like pensioners. This is especially so fuel and food prices have further exacerbated infla- in Lebanon where basic items of the consumption tionary pressures and have threatened food security basket are the primary drivers of overall inflation. in Lebanon since the onset of the Ukraine war. In The main contributors to inflation over 2021 and fact, Lebanon was among the countries worst hit by H1-2022 are food and non-alcoholic beverages, food price inflation since the onset of the Ukraine war, followed by transportation, water, electricity, and which breached 390 percent (yoy) over 6M-2022, gas (Figure 9); prices for these basic consumption having reached its highest mark of 483 percent (yoy) items have surged by 316.9, 323.3, 154.1 percent in January 2022. Overall inflation averaged a record on average, respectively, in 2021 and the increase 218 percent (yoy) in H1-2022. was sustained in H1-2022. Recent Macro-Financial Developments 11 FIGURE 10 • Short-lived Appreciation in the US$ Banknote Rate following BdL’s Active Interventions in the FX Market 45,000 250 40,000 35,500 200 30,500 US$ Million 150 LBP/US$ 25,000 20,000 100 15,000 10,000 50 5,000 0 0 26-Jul-21 9-Aug-21 23-Aug-21 6-Sep-21 20-Sep-21 4-Oct-21 18-Oct -21 1-Nov-21 15-Nov-21 29-Nov-21 13-Dec-21 27-Dec-21 10-Jan-22 24-Jan-22 7-Feb-22 21-Feb-22 7-Mar-22 21-Mar-22 4-Apr-22 18-Apr-22 2-May-22 16-May-22 30-May-22 13-Jun-22 27-Jun-22 11-Jul-22 25-Jul-22 8-Aug-22 22-Aug-22 5-Sep-22 19-Sep-22 3-Oct-22 17-Oct -22 LiraRate.com-rate BdL Sayrafa Platform Sayrafa Volume (rhs) Sources: IMF WEO and WB Staff Calculations. BdL’s FX interventions have only triggered increase in BdL’s foreign assets over the same period short-lived fluctuations in the BNR, suggesting (September 15-October 15). BdL’s foreign assets (for- limited ability to stem the currency depreciation eign currencies and foreign securities which include amid continued growth in narrow money. Circular US$5 billion in Lebanese Eurobonds) increased from 161 (December 16, 2021) removed all quotas on the US$14,621 million to US$15,038 million in the span monthly US$ liquidity provided by the Central Bank of one month. Upon BdL’s announcement on October to the banking sector, essentially making available 23rd that it would expand access to Sayrafa, the BNR an unlimited supply of foreign currency for banks dropped to 36,000 LBP/US$. BdL’s interventions in to sell to their clients on the BdL-managed Sayrafa the FX Sayrafa market, however, have only achieved Platform. Circular 614 (February 21,2022) expanded short-lived appreciations in both the Sayrafa and the the access to Sayrafa to money transfer companies US$ banknote exchange rates, at the expense of whose annual transactions volume exceeds US$50 dwindling foreign reserves, a testament to the unsus- million; thereby allowing money transfer companies tainability of such measures. to partake more broadly in foreign exchange transac- The banking sector balance sheet remains tions.39 The surge in the daily volume of transactions impaired despite regressive deleveraging schemes. on the Sayrafa platform was accompanied by a As of August 2022, 72 percent of banking assets are in temporary deceleration in the growth rate of currency sovereign securities, 64 percent of which are with BdL in circulation and a narrowing of the spread between in the form of deposits, while the remaining 8 percent the Sayrafa and US$ banknote exchange rates are in government securities (TBs and Eurobonds) and (Figure 10). The spread between the Sayrafa and claims on the public sector. Since June 2021, BdL has the US$ banknote exchange rates tends to narrow formally allowed for a gradual withdrawal of deposits, (widen) when BdL intervenes in the FX market by a lirafication scheme that has resulted in haircuts on easing (restricting) access to Sayrafa. However, lower deposits between 60–80 percent. During the first seven Sayrafa volumes, and a marked increase in currency months of 2022, customer deposits at commercial in circulation reaching a record LBP69.8 trillion by October 15, triggered another episode of rapid cur- 39 Circulars 69 and 157 restricted the conduct of foreign rency depreciation, with the BNR breaching 40,600 exchange transactions to banks. From October 5, 2021 LBP/$. Interestingly, the precipitous increase in until February 2022, OMT was the only money transfer currency in circulation outside BdL coincided with an company allowed to transact on Sayrafa. 12 LEBANON ECONOMIC MONITOR: TIME FOR AN EQUITABLE BANKING RESOLUTION banks declined by about US$5 billion (5 percent), on become even more concentrated, owing to the deposit top of a decline of US$9.6 billion (7 percent) in 2021, lirafication scheme (financial sector regressive delever- and of US$19.8 billion (12.5 percent) in 2020. Nonethe- aging) that has disproportionally burdened small and less, 80 percent of banks’ liabilities are private deposits medium depositors.41 The domestic credit portfolio has (only down from 90 percent at the onset of the crisis). further contracted by US$4.4 billion as of end-July 2022; Private deposits are highly concentrated, as pre-crisis, 50 percent of deposits in Lebanon’s banking system 40 World Bank-IMF (2017), Financial System Stability were owned by 1 percent of depositors, i.e., the vast Analysis, January 2017. value of deposits belong to a few high-net-worth individ- 41 About 77 percent of total deposits (US$98 billion) are uals (0.01 percent of depositors alone held 20 percent in FX; most of them (98 percent) are estimated to be in of deposits).40 Deposits post-crisis are likely to have pre-crisis dollars. BOX 2: TOO BIG TO BAIL Lebanon’s financial sector is too big to bail due to the size of the balance sheet and the losses involved. Losses in the financial sector stem primarily from (1) a sovereign that is in default on its public debt of approximately US$40 billion (173 percent GDP in 2021), and (2) a central bank, Banque du Liban (BdL) that has US$60 billion (259 percent of GDP)a in negative net foreign exchange reserves—by far the largest negative reserves of all central banks across the world; and (3) substantive losses in the private sector credit portfolio rendering the oversized banking system insolvent, against pre-crisis equity of US$22 billion. The financial sector’s total losses are estimated at US$72 billion (311 percent of GDP).. Given the size of the balance sheet losses, Lebanon’s financial crisis bears striking similarities with the 2008 financial crisis in Iceland (too big to bail)b; it is far from the Ireland case (too big to fail). With a banking sector ten times the size of GDP and heavily reliant on foreign borrowing, the Icelandic government came to terms with the lack of means to bailout its financial sector-it thus allowed its banks to fail, and instead used public money to shield the domestic economy and safeguard its welfare system. Ireland on the other hand, guaranteed the liabilities of the country’s six major failing banks, pumping close to 46 billion euros (30 percent of GDP) in the first two years, and only delaying the ‘day of reckoning’. Such bailouts swelled their national debt, had significant fiscal costs, required deploying ample liquidity, and dented investor confidence (Table 2).c TABLE 2 • Bailout Costs in Ireland and Iceland Fiscal Costsb Liquidity Provisionc % of Financial Increase in Output Lossa % of GDP Sector Assets Peak Liquidity Support Peak NPLsd Public Debte Ireland 107.7% 37.6% 4.5% 18.1% 15.4% 25.7% 76.5% Iceland 34.5% 37.6% 3.3% 33.8% 28.1% 61.2% 67.9% Source: Laeven, L., & Valencia, F., (2018). Systemic Banking Crises Revisited. IMF Working Paper, WP/18/206. a In percent of GDP. Output losses are computed as the cumulative sum of the differences between actual and trend real GDP over the period. b Fiscal costs refer to outlays directly related to the restructuring of the financial sector. c Liquidity is measured as the ratio of central bank claims on deposit money banks (line 12 in IFS) and liquidity support from the Treasury to total deposits and liabilities to non-residents. Total deposits are computed as the sum of demand deposits (line 24), other deposits (line 25), to non-residents (line 26). d In percent of total loans. e In percent of GDP. For episodes starting in 2007 and later, the increase in public debt is measured as the change in debt projections, over [T-1, T+3], relative to the pre-crisis debt projections, where T is the starting year of the crisis. Lebanon’s current and future assets (that belong to all the Lebanese) are insufficient to mobilize a financial sector bailout and will far from restore solvency and liquidity. State-owned assets and public real estate are worth only a fraction of the estimated financial losses.d Potential revenues from the nascent oil and gas industry are all but certain, and still years away; the IMF (2014)e estimates the revenues from Liquid Natural Gas (LNG) to amount to, at the peak, 4 percent of GDP under a baseline production profile, denting expectations that such distant revenues are enough to cover financial sector losses. Furthermore, managing potential hydrocarbon wealth hinges on (continued on next page) Recent Macro-Financial Developments 13 BOX 2: TOO BIG TO BAIL (continued) adequate governance and regulatory frameworks, yet to be established, in a context of a confessional power-sharing system marred by elite capture and in deep crisis. Thus, such inadequate bailout options neither lessen the leverage and risk taking of the banking sector, nor restores solvency and liquidity. The inability of banks to kickstart lending amid a prolonged credit crunch is detrimental to economy recovery prospects.f A financial sector bailout constitutes a transfer from taxpayers to-financial sector shareholders and big depositors, making them (as individuals) once again owners of profitable assets. Prior to the crisis, 50 percent of deposits in Lebanon’s banking system were owned by 1 percent of depositors, i.e., the vast value of deposits belong to a few high-net-worth individuals (0.01 percent of depositors alone held 20 percent of deposits).g These high value accounts were offered significantly higher interest rates, both in LBP and in US$, than what the 99 percent of depositors were offered. Hence, not only do they have an ability to contribute to the necessary haircuts (an important equity consideration), but the high returns they have benefited from also account for a notable share of the losses currently in the system (a key fairness consideration). Bail-in solutions, based on a creditors’ hierarchy, along with comprehensive reforms is the only realistic option for Lebanon to turn the page on its flawed development model. Bail-in solutions, put forth in the wake of the 2008 global financial crisis, can successfully address the “too-big-to-fail” (TBFF)h and “too-many-to-fail” (TMTF) problems,i limit recourse to public assets, and circumvent the moral hazards of a bailout.j Bail-in solutions can also circumvent the distorted funds allocation of bailouts, dictated by banks’ political and regulatory connections.k The pre-crisis strength of (i.e., confidence in) Lebanon’s development model was that the sovereign-BdL-banking nexus was so intricately linked through large mutual balance sheet exposures, that, like the three legs of a stool, none of those actors could exit without making the whole system collapse (i.e., a stable inferior equilibrium in game theory).l With the sovereign default of March 2020, the erstwhile equilibrium has collapsed. It must now move to a new equilibrium development model, one that is superior to its previously flawed one. As repeatedly called for, Lebanon has to urgently adopt a domestic, equitable, and comprehensive solution that is predicated on: (i) addressing upfront the balance sheet impairments, (ii) restoring liquidity, and (iii) adhering to sound global practices of bail-in solutions based on a hierarchy of creditors (starting with banks’ shareholders) that protects small depositors. a Based on World Bank estimates, also see similar estimates in: “Mapping out the path to the Lebanese Economic Recovery”, Goldman Sachs International, 2021; “Fitch Downgrades Lebanon to ‘CC’”, 2019; Moubayed, A., & Zouein, G. (2020). b Interestingly, part of the resolution of that banking crisis included an Investigation Commission aimed at “seeking the truth behind the events leading to, and the causes of, the downfall of the Icelandic banks in October 2008”. It was able to produce accountability for the crisis by detailing the failure, incompetence, and mishandling of a large number of individuals. c See for example: Byrne, E., & Þorsteinsson, H. F. (2012). Iceland: The accidental hero. What if Ireland defaults, 135–47. d See for example: Kostanian, A. (2021). Privatization of Lebanon’s Public Assets: No Miracle Solution to the Crisis. Online: Issam Fares institutes. e The same study estimates LNG revenues to GDP to stand at 7 percent of GDP at the peak of production under a hypothetical production profile assuming a long reserve horizon and increased production. f Chorafas, D.N., 2013. Public debt dynamics of Europe and the US. Elsevier. g World Bank-IMF (2017), Financial System Stability Analysis, January 2017; deposits post-crisis are likely to have become even more concentrated, owing to the deposit lirafication scheme (financial sector regressive deleveraging) that has disproportionally burdened small and medium depositors. h TBTF refers to government bail outs (from taxpayer money) of financial institutions/big firms in fear of their failure unleashing adverse consequences on the financial system and economy as a whole. i Berger, A. N., & Roman, R. A. (2020) j See for example: Goldstein, Morris and Veron, Nicolas. (2011); Stern, G. H., & Feldman, R. J. (2004) k Berger, A. N., & Roman, R. A. (2020) l This known forced resilience of system, inspired confidence and fed the source of the country’s problem: the large structural fiscal deficits that required ever growing capital inflows (mostly remittances) attracted by high dollar (or dollar-equivalent at the time) interest rates offered by BdL and the banking system. Over time, however, this produced oversized balance sheets among these three actors (sovereign, BdL, banks)—broadly several times GDP which placed each of these actors at the top of the global league in terms of balance sheet size or losses (e.g., Lebanon’s public debt consistently being among the highest in the world, or Lebanon’s banking system being among the largest in the world, in relation to the size of its economy). this is on top of a contraction by US$12.9 billion in 2021 the past three years, while tightening the terms on the and this brings the total credit contraction to about remaining, mainly trade lines with 100 percent cash 53 percent since the beginning of the crisis in 2019. collateral. At end-August 2022 commercial banks’ Lending from BdL has allowed Lebanese deposits and liabilities with non-resident financial commercial banks to pay off liabilities to corre- institutions amounted to US$4 and US$4.4 billion, spondent banks in order to retain linkages to the respectively, compared to US$4.6 and US$4.9 billion global financial system. Correspondent banks have in December 2021 and US$6.8 and US$8.8 billion in cut exposures to Lebanese banks by about half over December 2019. 14 LEBANON ECONOMIC MONITOR: TIME FOR AN EQUITABLE BANKING RESOLUTION Lebanese banks have retreated from A Steady and Sharp Deterioration in FIGURE 11 •  Cyprus and Iraq marking another milestone in Credit Performance as Measured by NPL Ratio for Banks the reversal of their international and regional expansion. Nine Lebanese banks are set to wind NPLs by Sector down their operations in Cyprus following a request Total Credit Portfolio by the Central Bank of Cyprus to fully guarantee their Consumption deposits. As part of their consolidation strategy since Housing 2019, Lebanese banks have also begun, according Financial Intermediation to media reports, to withdraw from the Iraqi market. Retail Trade Finally, the delay in the implementation of Wholesale Trade a meaningful and equitable banking resolution Contracting and Construction has triggered a series of bank raids. Depositors Processing Industries demanding access to their deposits (in cash and in dol- 0% 10% 20% 30% 40% 50% 60% 70% lars) stormed banks on multiple occasions. In response, Dec-21 Dec-20 Dec-19 banks closed their doors in October, restricting their services to ATMs and by appointment only. Sources: BdL and WB staff calculations. Recent Macro-Financial Developments 15 3 OUTLOOK AND RISKS S ubject to extraordinarily high uncertainty, money supply growth in 8M-2022. This is primarily we project real GDP to contract by a due to a change in the dynamic relationship between further 5.4 percent in 2022. Our projections inflation and depreciation. Our preliminary estimates (Table 3) assume that macro policy responses indicate that the CPI exchange rate pass-through remain inadequate. We also assume a minimum level has averaged 134 percent for 8M-2022, up from an of stability on the political and security scenes but average of 75 percent since the onset of the crisis refrain from assuming runaway inflation-depreciation (Figure 8). This increase is mainly on account of the or a complete depletion of FX reserves at BdL in the reduced share of goods imported at BdL subsidized next few months.42 exchange rates, and increased dollarization in the Monetary and financial turmoil continue to Lebanese economy (notably in services that had drive crisis conditions. The interactions between the been previously priced in LBP, at lower than market exchange rate, narrow money, and inflation continue value exchange rates and have now been dollarized). to shape unstable macroeconomic dynamics, and In the absence of a macro-financial stabili- therefore remain central to our macroeconomic out- zation strategy, a sizable current account deficit look. A first-degree effect of the sharp depreciation is projected for 2022, further depleting BdL’s in the national currency (which has lost more than useable gross reserves. We expect the current 95 percent of its value by September 2022) has been account deficit to widen to 14.2 percent of GDP in triple digit inflation rates associated with a very sharp 2022, primarily driven by the denominator led effect increase in narrow money. Hence, policies with impli- of an 8 percent contraction in nominal GDP in 2022. cations on narrow money supply, such as lirafication We estimate a slight worsening of the trade-in-goods and monetization of the fiscal deficit, will continue to be critical to the inflationary environment. 42 Given the paucity of Lebanon’s statistical system, our Inflation is expected to average 186 forecasts for the economy are based on advanced percent in 2022, amongst the highest rates glob- econometric techniques that are particularly well suited ally, despite the relative deceleration of narrow to extract information in data poor environments. 17 deficit in 2022. In fact, high frequency customs data governmental revenues, any crisis resolution plan that for 7M-2022 indicate a 34 percent increase in the relies on these would lack credibility and fail. value of total imports, which more than offset a 12 per- Staunch inequality, and a heavy concen- cent increase in exports relative to 2021. Even more tration of deposits with a few high-net-worth pronounced than import dynamics in 2021, vehicles, individuals, implies that a financial sector bailout aircraft, vessels, and transport equipment witnessed would redistribute wealth from poorer to richer a 95 percent increase in imports in 7M-2022, while households. Therefore, not only is a financial machinery and electrical instruments rose by 117 per- sector bailout unviable, but it would also entail tax- cent over 7M-2022, in anticipation of the increases in payers bailing out bank equity holders and wealthy custom duties and the customs duties exchange rate. depositors, undermining both equity and fairness con- Our economic forecast pays heed to per- siderations. The global literature also warns against sistent lack of political will for comprehensive the Distorted funds allocation of bailouts, dictated by reforms, and an unprecedented institutional banks’ political and regulatory connections,45 a risk vacuum. A caretaker Government struggling to that is especially pronounced in the case of Lebanon. interpret the extent of its executive authority under We posit that delays in applying bail-in a Presidential vacuum, and a divided Parliament solutions, the only equitable resolution, further lacking consensus to pass critical laws adds further hinder the ability to protect small depositors, in material delays to the start of the EFF. The Lebanese cash and in dollars. Bail in solutions remain the political elite have proven to be remarkably resistant only credible, equitable and meaningful banking to comprehensive reforms despite the unprecedented resolution, that will ultimately better position banks multi-pronged crisis the past three years. The aver- to play a central role in economic recovery. The lack sion towards reforms and a complete rethinking of an of an equitable banking resolution only increases the unsustainable development model stem from a deeply economic costs of the crisis, as usable gross reserves entrenched history of elite capture, and an economic are gradually depleted, impeding the ability to protect model that has benefited a few at the expense of the small depositors. Respecting the hierarchy of claims rest of the population.43 (the sequence in which liabilities should be written We continue to assert that Lebanon’s down), starting with banks’ shareholders, is the only financial sector is simply too big to bail due to the way to rectify the past years’ regressive adjustment magnitude of the losses in an oversized balance and financial deleveraging that has disproportionally sheet. Recourse to public assets (worth only a fraction burdened small depositors, and the bulk of the local of the estimated financial losses), belonging to all the labor force paid in LBP. Lebanese people and future generations, represents a further socialization of (private sector) losses and 43 Previous editions of the LEM, as well as the 2015 goes against important global principles and equitable Lebanon Systematic Country Diagnostic (Link) have burden sharing. In addition, revenues from the nascent documented the consistent dearth of significant reforms oil and gas industry remain distant and uncertain. in the face of systemic risks. The country’s lack of basic The country should be mindful of a “presource curse” governance and accountability could also be seen by the lack of an approved budget law for over a decade defined as elevated expectations from oil discoveries in a row (likely the only country in the world with such leading to economic jeopardy, an all too familiar a record). phenomenon (Ghana, Mozambique).44 Given this 44 See for example: Cust, J., & Mihalyi, D. (2017). uncertain valuation of both public assets and future 45 Berger, A. N., & Roman, R. A. (2020). 18 LEBANON ECONOMIC MONITOR: TIME FOR AN EQUITABLE BANKING RESOLUTION TABLE 3 • Selected Macroeconomic Indicators for Lebanon; 2013–2022 2020 2021 2022 2013 2014 2015 2016 2017 2018 2019 Act. Proj. Real sector (annual percentage change, unless otherwise specified) Real GDP 3.8 2.5 0.6 1.6 0.8 –1.7 –7.2 –21.4 –7.0 –5.4 Real GDP per capita a –2.8 –3.2 –3.6 –1.1 –0.7 –2.2 –7.2 –21.8 –7.5 –5.9 Agriculture (share of GDP) 3.9 4.4 3.8 4.0 4.5 4.4 5.0 6.0 6.0 6.0 Industry (share of GDP) 14.2 13.4 12.7 12.8 12.3 12.0 10.7 12.8 12.8 12.8 Services (share of GDP) 70.9 71.3 71.9 71.6 71.6 72.2 74.1 76.9 78.6 78.8 Net indirect taxes (share of 11.0 10.9 11.6 11.7 11.6 11.4 10.3 4.3 2.6 2.4 GDP) Money and prices CPI inflation (p.a) 2.7 1.2 –3.7 –0.8 4.5 6.1 2.9 84.3 150.0 186.0 Money b 9.0 6.0 5.1 7.3 4.2 3.0 –6.7 227.0 109.0 11.0 Investment & saving (percent of GDP, unless otherwise specified) Gross capital formation 27.6 24.9 22.2 22.6 21.3 20.7 12.3 7.7 5.0 7.4 o/w private 25.8 23.4 20.8 21.2 19.8 19.0 11.0 7.4 4.9 7.3 Gross national savings 2.1 –1.3 5.1 2.2 –1.5 –3.5 –9.6 –1.6 –7.4 –6.8 o/w private –1.8 –3.9 1.0 –1.0 –4.8 –5.3 –10.5 1.4 –8.3 –7.4 Central government finance (percent of GDP, unless otherwise specified) Revenue (including grants) 20.1 22.6 19.1 19.3 21.8 20.9 20.7 13.1 6.6 6.0 o/w tax revenues 14.3 14.3 13.7 13.7 15.4 15.3 15.5 9.0 5.4 5.2 Total expenditure and net 29.0 28.9 26.8 28.5 28.5 31.8 31.2 16.4 5.9 5.5 lending Current 27.3 27.3 25.5 27.2 27.0 30.2 29.9 16.1 5.8 5.4 o/w interest payment 8.1 8.7 8.9 9.3 9.4 9.8 10.0 2.5 1.0 0.6 Capital & net lending 1.8 1.5 1.4 1.4 1.5 1.7 1.3 0.4 0.2 0.1 (excluding foreign financed) Overall balance (deficit (–)) –9.0 –6.3 –7.7 –9.2 –6.7 –10.9 –10.5 –3.3 0.7 0.5 Primary balance (deficit (–)) –0.9 2.4 1.2 0.0 2.7 –1.2 –0.5 –0.8 1.7 1.1 External sector (percent of GDP, unless otherwise specified) Current account balance –25.6 –26.2 –16.9 –20.4 –22.9 –24.3 –21.9 –9.3 –12.5 –14.2 Trade balance –28.4 –29.9 –22.8 –23.6 –24.6 –24.6 –24.9 –20.3 –31.0 –31.9 o/w export (GNFS) 44.5 40.0 39.6 37.2 35.9 35.5 35.5 28.2 44.9 48.0 Exports of goods 11.0 9.5 8.0 7.7 7.6 7.0 9.3 12.9 20.1 19.7 Exports of services 33.5 30.6 31.6 29.5 28.3 28.5 26.1 15.3 24.7 28.4 o/w import (GNFS) 73.0 69.9 62.4 60.7 60.5 60.1 60.4 48.5 75.9 79.9 Imports of goods 45.3 42.5 35.1 34.9 34.6 34.2 35.1 33.4 55.4 57.7 Imports of services 27.7 27.4 27.3 25.8 26.0 25.9 25.3 15.1 20.5 22.2 Net private current 3.4 4.9 6.8 4.8 2.3 2.5 5.7 14.3 22.4 22.0 transfers: Net remittances 5.0 5.8 7.1 6.6 5.1 4.2 6.1 10.3 15.9 17.7 Net income reciepts –0.6 –1.2 –0.9 –1.6 –0.5 –2.1 –2.6 –3.3 –3.9 –4.2 (continued on next page) Outlook and Risks 19 TABLE 3 • Selected Macroeconomic Indicators for Lebanon; 2013–2022 (continued) 2020 2021 2022 2013 2014 2015 2016 2017 2018 2019 Act. Proj. Capital accounts 0 0 0 0 0 0 0 0 0 0 Gross reserves (months of 11.7 13.1 13.8 15.2 15.6 14.3 14.3 18.8 12.0 9.7 imports GNFS)c,d Total public debt Total debt stock (in million 63,490 66,564 70,325 74,900 79,530 85,139 88,900 56,832 39,903 38,518 US$) Debt-to-GDP ratio (percent) 135.3 138.3 140.5 145.7 149.1 154.0 171.1 179.2 172.5 180.7 Memorandum items: Exchange rate, average 1,507.5 1,507.5 1,507.5 1,507.5 1,507.5 1,507.5 1,554.0 3,688.0 11,755.0 26,713.0 (LBP/US$)e GDP (in million US$) 46,909 48,133 50,066 51,389 53,325 55,276 51,954 31,712 23,132 21,317 Sources: Government data and World Bank staff estimates and projections. a Population figures, which include Syrian refugees registered with the UNHCR, are taken from the United Nations Population Division. b Prior to 2020 this is M3, including non-resident deposits; 2020 and after, this is M0 (currency in circulation). c Gross Reserves (months of imports GNFS) = (Imports of Goods & Services / Gross Res. excl. Gold)*12. d Total Imports using the BOP data from the Quarterly Bulletin of BdL. e We use the WB-AER to calculate the total debt stock and GDP in US$ million for 2019 onwards. 20 LEBANON ECONOMIC MONITOR: TIME FOR AN EQUITABLE BANKING RESOLUTION SPECIAL FOCUS I: GLOBAL COMPARATORS: THE HOLE IS GREATER THAN THE SUM OF ITS PARTS I n previous LEMs, we benchmarked Lebanon’s ly led to a full-blown civil war in 1988. GDP per capita financial crisis against Global Crisis Comparators. decreased from US$280 in 1989 to US$266 in 2001. The results consistently highlighted the severity of Health indicators and standards in Somalia became the Lebanon episode as it compares globally.46 In this among the worst in Africa. Alongside the human cost Special Focus, we assess the severity of Lebanon’s and suffering, and the destruction of political institu- crisis by comparing it to a select group of Fragile and tions, social and economic infrastructure, the conflict Conflict States (FCS). We note FCS commonalities also led to large internal and external migration. between Lebanon and recent episodes in Zimbabwe, Yemen, Venezuela and Somalia, which have been marred by elite capture, extractive institutions, civil 46 The Fall 2020 LEM, entitled The Deliberate Depression, strife or war, state failure and fragmentation. This compares Lebanon’s macroeconomic fundamentals in benchmarking exercise confirms that Lebanon’s the lead-up to the crisis to two groups of global crises macroeconomic performance is worse—or—at best— comparators: the Asian crisis countries of 1997–98, on par, with those of this specific FCS group. Noting and a more eclectic set of crises that occurred in the 2000’s [Argentina (2001), Greece (2008), Ireland (2008), differences in GDP per capita classifications, Lebanon Iceland (2008), and Cyprus (2012). We concluded that, is strikingly unique in its middle-income category. leading up to the crisis point, Lebanon’s macroeconomic fundamentals were weak compared to these global crises comparators, suggesting that the adjustment Fundamentals of Fragility process will be more painful and will take longer, even with optimal policy measures in place. In the Spring 2021 LEM, entitled Lebanon Sinking (To the Top Three), we Somalia suffered from structural fragmentation compared the Lebanon crisis to the most severe global that left political power historically dispersed be- crises episodes (from the mid-1800’s to 2013) and tween clans, Islamists and others. State fragmenta- concluded that the Lebanon episode could rank in the tion, factional politics and recurrent conflicts ultimate- top 10, possibly top three most severe crises globally. 21 Venezuela has been historically marred the above FCS select group (henceforth referred to by strident social inequalities, criminal violence, as merely the FCS group). Specifically, we compare corruption and poor economic performance. An the following macroeconomic indicators: real GDP over reliance on oil exports, exposed the economy to and real GDP per capita growth, the inflation rate, declines in oil prices, which in 2014 spelled the start of current account, fiscal revenues and public debt.47 a massive contraction in economic activity. Venezuela’s Lebanon’s four-year contraction (through GDP is estimated to have contracted by 86 percent 2021) in real GDP is estimated to have erased from its peak in December 2013 to the first quarter of 15 years of economic growth. Although real GDP 2020. The shortfall in revenues and the widening fiscal growth has been anemic since the onset of the Syrian deficit—which is estimated to have stood at 31 percent conflict, the contraction commenced in 2018 (t-1), one of GDP in 2019—was met by printing money. This stoked year before the crisis broke. The downward trend has inflationary pressures, which reached hyperinflation steepened since, with real GDP growth contracting by level at 130,060 percent in 2018 and 9,585 percent in 21.4 percent in 2020 (t+1) and 7.0 percent in 2021 2019. Venezuela’s economic crisis decimated human (t+2) (Figure 12). By the end of 2021, Lebanon’s real capital, leading to an exodus from the country. GDP index (2019 = 100) is estimated to have stood at Zimbabwe has also been historically marred 73.1, representing a contraction of 34.6 percent since by fragility, conflict and violence. To a large extent, 2018; this is comparable to the 2007 real GDP index these have stemmed from a racially troubled history of 74.5 (Figure 13). associated with its colonized and post-colonized Cumulatively, the contraction in Lebanon’s experience. Zimbabwe’s gradual degradation culmi- real GDP between time t-1 and t+2 closely trails nated in a lack of provision of public services and, Yemen’s to be the second largest among the FCS ultimately, a collapse of the State. At the heart of the comparators. Lebanon’s contraction of 34.6 percent collapse was a macroeconomic crisis that involved is marginally smaller than the cumulative contraction an inflation-depreciation spiral. By 2008, Zimbabwe’s experienced by war-torn Yemen of 38.8 percent. The income per capita had halved relative to 1980 and the contraction in Lebanon’s real GDP is comparable to country witnessed the deadliest outbreak of cholera Venezuela as far as duration is concerned. in Africa. In 2009, Zimbabwe replaced its official cur- Real GDP per capita has been falling since rency with the US dollar and other foreign currencies 2016, reaching a trough in 2020 (t+1) (Figure 14). to stem persistent hyperinflation. Lebanon stands out as the only country with a nega- Yemen was subject to elite capture of tive growth in real GDP per capita in each of the resources as well as tribal, regional and sectarian years between t-3 and t+2. Further, the decline in real divisions. The fragmentation and fragility ultimately GDP per capita in 2020 (t+1) is the largest among helped pushed the country into an armed conflict comparators. Only Yemen (2015) and Venezuela in June 2014. This conflict has been part of a wider (2013) have witnessed contractions of comparable, regional struggle, geopolitically linking Yemen to Syria, albeit still smaller magnitudes. Iraq and Lebanon. The human toll of conflict proved Lebanon’s inflation is the second highest to be devastating. An estimated 40 percent of house- among comparators, trumped only by Venezuela’s holds have lost their primary source of income and the hyperinflation (2013). Lebanon’s inflation was in conflict has left at least 24.1 million people in need of check in the lead up to the crisis, before increasing humanitarian assistance, 3.7 million people internally rapidly in 2020 (t+1) (Figure 15). As the exchange displaced and 70 percent of population facing hunger. rate peg—which provided a nominal anchor for The Macroeconomics 47 The list of countries and data are sourced from the IMF’s World Economic Outlook (WEO) and includes 196 We proceed to compare some of Lebanon’s worst- countries. Lebanon’s data are sourced from World Bank performing macroeconomic indicators to those in databases. 22 LEBANON ECONOMIC MONITOR: TIME FOR AN EQUITABLE BANKING RESOLUTION Lebanon Sees the 2nd Sharpest FIGURE 12 •  Sustained Real GDP Contraction FIGURE 13 •  Contraction in Real GDP Is Expected to Erase 15 Years of Progress by End-2022 RGDP Growth 15 RGDP Indexed Series 10 160 5 140 0 Percent (%) –5 120 –10 100 –15 –20 80 –25 60 –30 t–3 t–2 t–1 t t+1 t+2 t+3 t+4 t+5 40 t–3 t–2 t–1 t t+1 t+2 t+3 t+4 t+5 Zimbabwe '98 Venezuela '94 Venezuela '13 Somalia '20 Yemen '95 Yemen '15 Zimbabwe '98 Venezuela '94 Venezuela '13 Lebanon '19 Somalia '20 Yemen '95 Yemen '15 Lebanon '19 Sources: IMF WEO and WB staff calculations. Sources: IMF WEO and WB staff calculations. FIGURE 14 • Real GDP Per Capita Contracting Only Venezuela’s Monumental FIGURE 15 •  since 2011 Inflation Beats that in Lebanon RGDP per Capita Growth CPI; (t=100) 25 900 5,000,000 20 800 4,500,000 15 700 4,000,000 10 3,500,000 Percent (%) 600 5 3,000,000 500 0 2,500,000 400 –5 2,000,000 –10 300 1,500,000 –15 200 1,000,000 –20 100 500,000 –25 0 0 t–3 t–2 t–1 t t+1 t+2 t+3 t+4 t+5 t–3 t–2 t–1 t t+1 t+2 t+3 t+4 t+5 Zimbabwe '08 Venezuela '94 Venezuela '13 Zimbabwe '08 Venezuela '94 Yemen '95 Yemen '95 Yemen '15 Lebanon '19 Yemen '15 Lebanon '19 Venezuela '13 (rhs) Sources: IMF WEO and WB staff calculations. Sources: IMF WEO and WB staff calculations. prices—collapsed, the exchange rate pass-through the lead-up to the crisis (t-3 till t), Lebanon maintained to prices was forceful. Inflation, which averaged the largest CA deficit (Figure 16) among comparators 84.3 percent in 2020, increased markedly in 2021 to while its fiscal deficit was consistently among the average 150 percent. The triple-digit inflation implies largest (Figure 17).48 Despite the import compres- a staggering fivefold increase in the price level over sion during the crisis, Lebanon’s CA deficit is the the period 2019 (t)-2021 (t+2). largest among comparators and is comparable only Despite the import compression during to Somalia’s (2020). The declining debt service, as a the crisis, Lebanon’s CA deficit is still the largest consequence of the default on foreign debt, and the among comparators, but its overall fiscal deficit drastic cutbacks in primary spending, coupled with a is narrower than most comparators. Lebanon’s post-civil war economic landscape is characterized by 48 Somalia (’20) data from 2019 onwards are estimates, persistent and sizeable twin—fiscal and CA—deficits. In according to IMF WEO. Special Focus I: Global Comparators: The Hole is Greater Than the Sum of its Parts 23 Lebanon Maintains the Worst CA FIGURE 16 •  While Its Fiscal Deficit Narrows FIGURE 17 •  Deficit Throughout Only after the Crisis Current Account Balance (% of GDP) Overall Fiscal Balance (% of GDP) 20 10 15 5 10 0 5 –5 0 % of GDP % of GDP –10 –5 –10 –15 –15 –20 –20 –25 –25 –30 –30 –35 t–3 t–2 t–1 t t+1 t+2 t+3 t+4 t+5 t–3 t–2 t–1 t t+1 t+2 t+3 t+4 t+5 Zimbabwe '98 Venezuela '94 Venezuela '13 Zimbabwe '98 Venezuela '94 Venezuela '13 Somalia '20 Yemen '95 Yemen '15 Somalia '20 Yemen '95 Yemen '15 Lebanon '19 Lebanon '19 Sources: IMF WEO and WB Staff Calculations. Sources: IMF WEO and WB Staff Calculations. Lebanon’s Public Debt is the Worst FIGURE 18 •  the world in the lead-up to the crisis, Lebanon’s debt- among Comparators to-GDP has increased since 2019 due to external Gross Debt (% of GDP) debt revaluation, as a result of the depreciating LBP, 200 on top of a persistent fiscal deficit financed by new 180 debt. In fact, Lebanon’s debt-to-GDP is the highest 160 140 among the comparators prior to and during the % of GDP 100 crisis (Figure 18. Lebanon’s Public Debt is the Worst 80 Among). Only Venezuela’s debt-to-GDP exhibits 60 40 a similar steep upward trajectory five years into its 20 crisis (t+5). 0 t–3 t–2 t–1 t t+1 t+2 t+3 t+4 t+5 The mere fact that Lebanon’s macroeco- nomic performance is worse than that of states Zimbabwe '08 Venezuela '94 Venezuela '10 Somalia '20 Yemen '95 Yemen '15 marred by fragility, conflict and violence speaks Lebanon '19 to the grave toll of the Deliberate Depression. Lebanon’s macroeconomic performance is, for most Sources: IMF WEO and WB staff calculations. indicators, worse than that of a comparator group comprising countries that have been marred by denominator effect, have narrowed the fiscal deficit elite capture, extractive institutions, civil strife or war, since 2019 (t). As a result, Lebanon fares better than state failure and fragmentation. Our Fall 2021 LEM Yemen (1995), Venezuela (1994), Yemen (2015) and The Great Denial warned that the scale and scope Venezuela (2013) in terms of the overall fiscal deficit. of Lebanon’s Deliberate Depression is leading to the In fact, Lebanon’s overall fiscal deficit is the third disintegration of key pillars of Lebanon’s post-civil war smallest, following Venezuela (1994) and Zimbabwe economy. Our Spring 2021 LEM Lebanon Sinking (2008). Venezuela (2013), whose overall fiscal balance (to the Top 3) argued that brutal and rapid contrac- widened massively between (t+2) and (t+5), stands out tions in economic activity such as Lebanon’s are as having the largest fiscal deficit among comparators. usually associated with conflicts and wars. This latest The crisis has increased Lebanon’s noto- benchmarking exercise confirms that Lebanon’s mac- riously high public debt making it the highest roeconomic performance is worse—or —at best—on among comparators. Hitherto among the highest in par, with that of FCS. 24 LEBANON ECONOMIC MONITOR: TIME FOR AN EQUITABLE BANKING RESOLUTION SPECIAL FOCUS II: DOLLARIZATION IN LEBANON T he use of the US dollar in Lebanon has a complicates the task of identifying the currency de- long history, going back to the 1975–1990 nomination of transaction payments and valuations of civil war. The extent of dollarization is a goods and services. Both de jure and de facto insti- marker of confidence in the Lebanese Pound, and tutional factors underpin the denomination of foreign more generally macroeconomic policy management. versus domestic currencies in an economy. Knowl- Our analysis of dollarization in Lebanon, shows edge of these country-specific factors is essential. that multiple currency crises have historically led to However, transaction-level data disaggregated into hysteresis in dollarization, with the level of dollarization currency composition are difficult to obtain. As such, in deposits, lending and public debt increasing over the literature has depended on key macro indicators time. We further find Lebanon’s financial system that can quantify the dollarization rate in an economy. did not offer sufficiently diverse investment and Dollarization is the process of replacing hedging opportunities, which, in turn, helped drive the domestic currency with a foreign one to serve dollarization even higher. While macro and micro the essential roles of money in the economy. prudential measures were successful at lowering Money is often defined in terms of the three func- the dollarization rate, their quasi-fiscal nature led tions or services that it provides.50 These are: (i) as to sizable (and opaque) liabilities which eventually contributed to the ongoing systemic failures which has 49 This note does not take a position on the currency board further reduced confidence in the LBP. We conclude discussion that is taking place in Lebanon, as this would that dollarization is expected to remain elevated in require further, more targeted examination. We caution Lebanon, even upon recovery and macroeconomic that determinants and dynamics of dollarization are different from those of a currency board. stability.49 The development of capital markets remains 50 Calvo and Vegh (1996) differentiate between currency unattainable under current conditions and will require substitution—where a foreign currency replaces the macroeconomic stability in the short term and a new domestic currency as a medium of exchange—and growth model in the long term to reverse dollarization. dollarization, which also includes the foreign currency being used as a unit of account and store of value. In fact, the authors lay out the following causal process; in a high inflationary environment, a foreign currency is Accounting for Dollarization first used as a store of value and/or a unit of account, and only later as a medium of exchange. Accordingly, Gauging the extent of dollarization in an economy currency substitution is the last stage of the dollarization is limited by data availability. The paucity of data process (Calvo and Vegh, 1996, pg. 1–2). 25 a medium of exchange that facilitates transactions, FIGURE 19 • Lebanon Suffered from Consistently without which a barter system—the direct exchange Sizable External Deficits since the End of the Civil War of one good or service for another—takes hold; (ii) as a unit of account that provides a common measure 30,000 of the value of goods and services being exchanged; 20,000 and (iii) as a store of value that preserves its value 10,000 over time.51 US$ Million 0 Financial dollarization is associated with the loss of the local currency’s functionality –10,000 as a store of value (Catão and Terrones, 2016, –20,000 pg. 4). In Lebanon, financial dollarization—whereby –30,000 commercial banks collect deposits and disburse –40,000 loans in two or more currencies— is relatively easy to 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 gauge. Toward that end, we use indicators based on published financial statistics; specifically, dollariza- Imports of Goods Imports of Services Exports of Goods Exports of Services tion rates for private deposits in commercial banks Total Imports Total Exports and private loans by commercial banks. As a proxy for public sector financial dollarization, we can also Sources: BdL, MoF and WB staff calculations. examine the ratio of FX-denominated public debt to gross public debt. Less straight forward would be to quan- Foreign currency—primarily US dollars— tify dollarization associated with the medium of constituted by far the main store of value for exchange and unit of account functionalities post-civil war Lebanon. With variations on rates and of money. While this is not a Lebanon-specific con- instruments used, financial dollarization is clearly a straint,52 it is especially limiting in our case due to the fundamental characteristic of the pre-crisis economy low statistical capacity in the country. Faced with data (Figure 20. High rates of financial dollarization were limitation we proceed as follows: a fundamental feature post-civil war Lebanon.). We highlight the following: 1. A good proxy for the medium of exchange functionality in the case of Lebanon would be • Examining data available as of October 1991 ratios involving Value of FX Cleared Checks to through the eve of the financial crisis (October Value of Total Cleared Checks (in FX and LBP). 2019), we find that (adjusted) dollarization rates53 2. At minimum, dollarization associated with the unit for private deposits in commercial banks have of account functionality is commensurate with the import share in the consumption basket. 51 https://www.cliffsnotes.com/study-guides/ While the first is self-explanatory, the second is economics/money-and-banking/functions-of-money. 52 “Financial dollarization (the use of foreign currency as justified by the sizable structural deficit in Lebanon’s a store of value) is easy to measure because data are external account (Figure 19); a large import bill has readily available in financial statistics. However, the imposed a substantial structural deficit in Lebanon’s true extent of dollarization, which should encompass current account balance, averaging close to 22 per- payment dollarization (the use of foreign currency for cent of GDP (1991–2019). Hence, a consumption transactions purposes) and real dollarization (the use of basket with a relatively high import component would foreign currency for denominating prices and wages), is more difficult to assess because information is not channel more directly FX valuation effects. Item readily available.” (Abdelati, 2008, pg 91). 2 proxy would be much weaker in an economy where 53 Adjusted dollarization rates are dollarization rates that the share of imports in the consumption basket is not are adjusted for valuation effects from exchange rate considerable. variations in the period prior to the peg (pre-1998). 26 LEBANON ECONOMIC MONITOR: TIME FOR AN EQUITABLE BANKING RESOLUTION FIGURE 20 • High Rates of Financial FIGURE 21 • FX-Denominated Checks Dollarization Were a Fundamental Consistently Out-Valued LBP- Feature Post-Civil War Lebanon Denominated Checks over the 1991–2019 Period 90 80 100% 70 90% 60 80% Percent (%) 50 70% % of Total Checks 40 60% 30 50% 20 40% 10 30% 0 20% 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 10% Adjusted Private Sector Deposit Dollarization 0% 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 Lending Dollarization; Resident Private Sector FX Debt/ Gross Public Debt Checks in FX Checks in LBP Sources: BdL, MoF and WB staff calculations. Sources: BdL and WB staff calculations. fluctuated between a peak of 86.7 percent in Determinants of Dollarization in September 1992 and a trough of 56.4 percent in Lebanon March 1997. • Dollarization rates for private loans by commercial Guided by the global literature, we identify prin- banks—available over a narrower times series of cipal determinants of dollarization, and find that data from December 2005 to October 2019— in the case of Lebanon, multiple currency crises ranged from a peak of 85.1 percent (May 2008) have historically driven high levels of dollariza- to a trough of 66.4 percent in July 2018. tion. Examining global episodes, the literature high- • Examining dollarization in the public sector, the lights the following important drivers relevant to the share of FX public debt to gross public debt has Lebanon case: (i) exchange rate and macroeconom- increased steadily to reach a peak of 52.5 percent ic policies and environment; (ii) macro and micro-pru- by February 2005, before moderating to be in the dential policies and environment; and (iii) depth of fi- high thirties by the eve of the crisis. nancial and capital markets. Using currency breakdown of Cleared Exchange rate and macroeconomic Checks, we find that foreign currency dominated policies and environment as a medium of exchange in post-war Lebanon (Figure 21). The ratio of FX-denominated checks to Studies suggest that exchange rate flexibility in- total checks in value fluctuated between a peak of hibits dollarization up to a certain degree of vola- 78.6 percent (August 2008) and a trough of 45.3 per- tility, beyond which dollarization is enhanced, and cent (October 2019). is difficult to reverse. Allowing two-way exchange Agents used foreign currency as a main rate movements makes foreign exchange risk more unit of account in post-war Lebanon. We present in apparent, helping to introduce incentives for lower dol- Box 3. Estimating the Import Share of the Consumption larization (Hardy and Pazarbasioglu, 2006) and/or the Basket. an approach to apply item 2 from paragraph. development of hedging instruments. This is support- The result suggest that dollarization associated with the ed by empirical evidence in Kokenyne et al. (2010), unit of account functionality is equal to X * 61.1 percent, who find it significant in two out of the four countries such that X>1. studied by Garcia-Escribano and Sosa (2011) in Latin Special Focus II: Dollarization in Lebanon 27 BOX 3: ESTIMATING THE IMPORT SHARE OF THE CONSUMPTION BASKET We use consumption-based weights to estimate the import components of the consumption basket in Lebanon. To proceed, we adopt the following nomenclature: • Cg denotes share of goods in the consumption basket; • Cs denotes share of services in the consumption basket; • Cgm denotes ratio of imported goods to total goods in the consumption basket; • Csm denotes ratio of imported services to total services in the consumption basket; Cg and Cs are derived from the weights for different components in the Consumer Price Index (CPI). Specifically, Cs is calculated by summing up the weights of CPI components that are assumed to be focused on the consumption of services.a Remaining components in the CPI are assumed to be focused on the consumption of goods. Hence, Cs = 53% Cg = 1 – Cs = 47%b We assume Cs and Cg remain unchanged throughout the examined period. We assume that 85 percent of goods in the consumption basket are imported, whereas only 40 percent of services in the consumption basket are imported. Hence, Cgm = 85% Csm = 40% We assume Cgm and Csm remain unchanged throughout the examined period. The estimated weighted import share of the consumption bask would be = (Cgm x Cg) + (Csm x Cs) = (85% x 47%) + (40% x 53%) = 61.1% a Components assumed focused on the consumption of services and their associated weights are: Housing, rent (weight = 3.4%); Housing, owner occupied (13.2%); Health (7.8%); Transportation (13.1%); Communication (4.6%); Recreation, amusement and culture (2.3%); Education (5.9%); and Restaurant & hotels (2.6%). b While the above components that are assumed focused on the consumption of services also include goods (i.e. communication), we can assume that this is offset by components that are assumed focused on the consumption of goods but that also include services. America. Everaert (2016) finds evidence in a panel of increases the confidence in the local currency, thereby 33 emerging market countries of causality from great- reducing the need for using FX to preserve purchas- er exchange rate flexibility to lower dollarization. Ex- ing power. Credible monetary and fiscal policies along cessive exchange rate volatility, however, can encour- with the development of local currency markets sup- age dollarization, as the local currency loses important ported de-dollarization in several countries (De Nicolo money functionalities (medium of exchange, unit of et al, 2005). Inflation targeting has also been found to account and a store of value). Naceur et al (2015) ex- be more conducive to de-dollarization than other mon- amine dollarization rates in the Caucasus and Central etary arrangements (Rennhack and Nozaki, 2006; and Asia region, which are among the highest in the world. Catão and Terrones, 2016). The authors find that currency depreciations and high Up to the dramatic failure of the peg volatility of exchange rates are associated with a rise brought about by the financial crisis in end- in FX deposits, but not in FX loans. 2019, Lebanon enjoyed exchange rate stabili- More generally, the literature emphasizes ty for over two decades. The peg was introduced credible macroeconomic management as a pre- toward the end of 1998 setting the Lebanese Pound condition for durable de-dollarization. De-dollar- at LBP1,507.5/US$. This followed a tumultuous peri- ization requires restoring the functioning of, and trust od for the LBP; over the last two years of the civil war in, the national currency. Stable and low inflation (1988–90), the LBP depreciated by over 200 percent, 28 LEBANON ECONOMIC MONITOR: TIME FOR AN EQUITABLE BANKING RESOLUTION FIGURE 22 • The Lira Suffered Multiple Crises before the Peg Was Introduced 3,000 200 150 2,000 100 Percentage LBP/US$ 1,000 50 500 0 0 –50 Jan-88 Jan-89 Jan-90 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Exchange Rate Inflation Rate (CRI, rhs) Inflation Rate (CAS, rhs) Sources: BdL, CRI, CAS and WB staff calculations. and by 187 percent between November 1992 and dollarization to diminish significantly. The 2019 finan- November 1992, to reach a then peak of LBP2,500/ cial crisis will further aggravate the challenges in the US$ (Figure 22). Even prior to this, the Lira suffered process of de-dollarization. multiple crises over the course of the civil war, starting Dollarization in Lebanon was underpinned the 1980s at around LBP3.5/US$ and falling to above by weak macroeconomic fundamentals. These LBP500/US$ by the end of the decade.54 include an integrated macro-financial structure of Prices of goods and services have mirrored high debt levels, large twin deficits (fiscal and current exchange rate conditions. Clearly other factors account), an oversized banking sector and a strong determine inflation, including inflation rates in trading peg. The pre-crisis financing needs were substantial, partner countries and commodity prices etc. None- primarily funded via a banking sector whose balance theless, surging inflation rates in Lebanon have mir- sheet reached over four times GDP. BdL ensured rored the country’s currency crisis episodes. Further, that banks kept attracting foreign deposits and that the period of exchange rate stability (1998–2019) has the public and private sectors gross financing needs also witnessed price stability and moderation. were met, thereby financing the sizable current and Multiple currency crises left irreparable fiscal account deficits. To attract foreign deposits, damage on the Lira’s credibility, which clear- BdL introduced dollar-denominated certificates of ly became a main driver of dollarization. In fact, deposits and various subsidized FX refinancing under such tumultuous conditions, dollarization can schemes. To meet the needs of Government, BdL was be a very persistent (Reinhart et al., 2003; Galindo the residual buyer of Government debt in the primary and Leiderman, 2005; Castillo and Winkelried, 2005). and secondary markets. Other critical push and pull Further, once macroeconomic stability is achieved, factors laid fertile grounds for capital inflows. These the impact of lower inflation or sovereign spreads include (i) a large diaspora; (ii) a banking secrecy law; (such as EMBI) has been found to be too small to con- tribute significantly to further de-dollarization (Garcia- Escribano and Sosa, 2011). Indeed, dollarization can 54 Los Angeles Times, November 29, 1987. 55 “There is a large literature that has documented that be quite persistent even after macroeconomic stabili- financial dollarization in some emerging economies ty is achieved.55 Hence, despite the prolonged stabili- displays “hysteresis”—that is, it rises in periods of economic ty of the exchange rate over 1998–2019 period, con- disarray but does not fall proportionately when the cerns over Lira strength never abated sufficiently for economy is stabilized” (Catão and Terrones, 2016, pg 8). Special Focus II: Dollarization in Lebanon 29 and (iii) a banking business model that successfully BdL has mandated compulsory reserve expanded and linked to the diaspora. requirements on deposits (LBP and FX) in com- While deposit dollarization was critical to mercial banks to be placed with the central bank. the post-war macro-financial structure, it also Commercial banks are required to place 25 and drove other dollarization in the economy, includ- 15 percent of demand LBP deposits and time LBP ing the dollarization of lending as well as the pub- deposits, respectively, as reserve requirements with lic debt. This causality is explained: BdL. FX deposits at commercial banks were subject to reserve requirement ratio of 15 percent until June “Dollarized deposits induce dollarization 2021; it was thereafter brought down to 14 percent. of loans. High levels of FX deposits en- As of 1997, Lebanon’s central bank courage banks to lend to domestic bor- launched numerous initiatives to entice medium rowers in foreign currency to maintain and long-term lending in LBP to the private sector matched balance sheet positions, in effect (World Bank, 2016). Notably, in 2001, BdL allowed transferring the burden of exchange rate for reductions in commercial banks’ reserve require- risk to depositors. Neanidis and Savva ments in return for undertaking lending in a number (2009) find that short-term loan dollariza- of sectors, including IT, agriculture and tourism. tion is largely driven by currency match- The reductions in banks’ reserve require- ing by banks” (Naceur et al, 2015, pg. 11). ments were substantially expanded in 2009. “The success of these incentives led BdL to increase the Macro and micro-prudential policies and deduction ceiling to 90 percent in January 2011” environment (World Bank, 2016). As part of this subsidy scheme, BdL lent a total of US$3.37 billion over the 2013–15 Macro and micro-prudential policies can help period. In excess of 76 percent of this subsidized reduce dollarization over time. These can include lending went to the housing sector. differential treatment of reserve requirements on FX BdL’s financial prudential measures56 were versus local currency deposits (e.g. higher reserve seemingly effective in lowering dollarization rates requirements on FX deposits, different remuneration, across deposit and lending facilities. While a or requiring reserve requirements on FX deposits to more robust econometric analysis is needed, we see be in local currency), stricter prudential requirements evidence on the efficacy of these macro and micro (e.g. higher liquidity ratios on FX liquidity, charging prudential measures on lowering dollarization. As higher risk premia on deposit insurance for FX illustrated in Figure 23. Dollarization rates on deposits deposits), lower loan-to-value limits and/or stricter and lending interacted in distinct ways over three limits on collateral evaluation or requirements, and main periods., dollarization rates generally varied limits on open FX positions. The latter typically are over three periods. linked to the findings that reductions in deposit dollarization help speed up credit de-dollarization i. The 2005–2008 period—in the black elliptical in (Luca and Petrova, 2007). Kokenyne et al. (2010) Figure 23. Dollarization rates on deposits and provides empirical support for the effectiveness of lending interacted in distinct ways over three main micro-prudential measures. Garcia-Escribano and periods.—preceded BdL’s expanded measures; Sosa (2011) show that macro-prudential regulations then, deposit dollarization rates hovered between (especially reserve requirements and prudential low and high 70’s percent, while lending dollarization regulations) contributed to credit de-dollarization in rates were steady in the mid 80’s percent. four Latin American countries (including Peru) but had a more limited impact on deposit de-dollarization. Lower insurance for FX deposits, however, can also 56 For a detailed description of these measures, please see lead to lower financial intermediation (Moron and the Special Focus in World Bank. 2016. The Big Swap: Castro, 2003). Dollars for Trust, Lebanon Economic Monitor, Fall 2016. 30 LEBANON ECONOMIC MONITOR: TIME FOR AN EQUITABLE BANKING RESOLUTION FIGURE 23 • Dollarization Rates on Deposits and Lending Interacted in Distinct Ways over Three Main Periods. 85 Adjusted Private Sector Deposit Dollarization 2020 80 2021 2007 2019 2006 75 2005 2018 2008 2017 70 2016 2013 2011 2014 2009 2015 2012 2010 65 50 60 70 80 90 Lending Dollarization; Resident Private Sector Sources: BdL and WB staff calculations. ii. The 2010–2016 period—in the green elliptical lowering dollarization rates, their quasi-fiscal nature in Figure 23. Dollarization rates on deposits and led to sizable liabilities which eventually helped lead lending interacted in distinct ways over three to systemic failures. main periods.—coincided with the full effect of BdL’s policies; there we see significant declines Depth of financial and capital markets give (~10 percentage points) for dollarization rates in both deposits and lending. Deepening local currency financial markets and iii. The 2019–2021 period—in the red elliptical in broadening savings options are other factors Figure 23. Dollarization rates on deposits and contributing to de-dollarization. Liquid bond mar- lending interacted in distinct ways over three kets offering a range of different savings instruments main periods.—is the crisis period. This period can act as alternative investment opportunities to dol- clearly illustrates crisis conditions; the complete lar deposits (e.g., including the ability for the public to shut down in the banking sector limit our ability to invest directly in local currency government bonds). It interpret these numbers, but we do note surging can also help extend the yield curve of public bonds. deposit dollarization rates. Garcia-Escribano and Sosa (2011) find this effect to be significant. Indexation, if credible, can provide While BdL measures were successful in a bridge to promote investments in local currency- lowering dollarization rates, they helped accrue denominated assets (Ize and Levy-Yeyati, 2005), and massive liabilities in both LBP and FX. The be gradually phased out over time as confidence in buildup of liabilities eventually played a significant local currency denominated assets increases (for in- role in the downfall of the macro-financial system stance, as it was the case in Chile or Colombia). (World Bank, 2016, 2017 and 2021). As such, we Lebanon’s financial system did not offer consider these macro and micro prudential mea- sufficiently diverse investment and hedging sures out of the context in which they were applied. opportunities, helping to drive dollarization higher. Instead, we observe lower degree causality effects, The Lebanese financial system was dominated by with the caveat that this should be subject to more commercial banks, with the non-bank financial sector robust econometric analyses. Thus, while macro marginal and relatively inconsequential. In fact, banks’ and micro prudential measures, were successful at assets constituted 97 percent of financial system Special Focus II: Dollarization in Lebanon 31 assets in Lebanon at end-2015 (WB-IMF, 2017). on the banking sector for their financing, as 53 percent BdL’s list of commercial banks in Lebanon (February of all firms—50 percent of small firms and 63 percent 2021) reached 142 in its count57—a very high number of medium-size firms—reported having received a bank for a country the size of Lebanon. By end of 2019, total loan (Le Borgne and Jacobs, 2016, pg. 43). client deposit accounts in commercial banks num- bered over 2,800,000, with banks total balance sheet reaching US$217 billion, equivalent to over 4 times 57 BdL, https://www.bdl.gov.lb/pages/index/4/25/List-of​ GDP. Moreover, Lebanese firms depended significantly -Institutions-Supervised-by-BdL.html. 32 LEBANON ECONOMIC MONITOR: TIME FOR AN EQUITABLE BANKING RESOLUTION REFERENCES Abdelati, Wafa Fahmi, 2006, Chapter 8: Interna- http://www.imf.org/external/pubs/cat/longres. tional Experience of De-Dollarization, Cambo- aspx​?sk=43877.0. dia Rebuilding for a Challenging Future, ISBN: Chorafas, D.N., 2013. Public debt dynamics of 9781589064447, 23 Feb 2006, International Europe and the US. Elsevier. Monetary Fund. 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